Cash Flow Problems: The Six Causes, What to Do This Week, and the Habit That Stops Them Coming Back

Cash flow problems are rarely a profit problem. A business can be profitable on paper and still run out of money, because profit is booked when you invoice and cash arrives when the customer pays. The usual causes are customers paying late, growth eating working capital, margins thinner than you think, overheads that grew with turnover, a tax bill in the wrong week, and the owner not looking. All six are fixable, and the last one is where you start.

This is for owners of established businesses who’ve had the moment: the accounts say you made money, and the bank balance says otherwise. I own and invest in businesses, and I’ve had that moment myself. This is what I do about it in my own companies and with the owners I work with.

Why profitable businesses run out of cash

Your profit and loss records a sale when you raise the invoice. Your bank records it when the money lands, which in the UK is often 30, 45 or 60 days later, and later still for the customers who treat you as a bank. In between, you’ve paid the wages, the suppliers and the VAT on a sale you haven’t been paid for.

Grow quickly and the gap grows with you. Every new job needs materials, people and time before it needs an invoice, and the invoice needs a month before it needs a bank statement. That’s why a lot of businesses hit their worst cash position in their best year.

So the first thing to accept is that cash flow is a separate thing from profit, with its own numbers, and it needs its own attention. Which brings us to the causes.

The six causes of cash flow problems

1. Customers paying late

The most common, and the one owners put up with longest, because chasing feels like damaging the relationship. It isn’t. Late payers are using your overdraft. Look at your debtor days: the average number of days between invoice and payment. If it’s 55 and your terms say 30, that’s nearly a month of sales sitting in other people’s bank accounts.

2. Growth eating working capital

The business is winning work faster than the work pays. Each new contract needs stock, staff and weeks of delivery before cash comes in. Growth without a cash plan is how good businesses go under in their busiest year.

3. Margins thinner than you think

If you price by adding a markup to cost, you may be making a much smaller margin than you believe. A 40% markup is a 29% margin. Thin margins mean every job generates less cash than it ties up, and the problem compounds with volume. The profit margin calculator will show you where you really are.

4. Overheads that grew with turnover

The office, the software, the extra manager, the salaries that went up when the good year came. Turnover dips, overheads don’t, and the cash goes with it.

5. The tax bill in the wrong week

VAT quarterly, corporation tax nine months after year end, PAYE monthly. None of them is a surprise, but they land as one if nobody’s put them in a forecast.

6. The owner not looking

This is the one that makes the other five dangerous. It’s your job as an owner to know the cash position; your accountant can help you forecast, but you’ve got to take responsibility for it. Where is the time set aside each week for you to look at the cash flow? For a lot of SME owners, and we can all put our hands up to this, the honest answer is nowhere. The bank balance gets checked when it’s frightening.

What to do in the next seven days

1. Build the 13-week forecast. Today’s bank balance, then every week for the next quarter: cash in you can actually expect, cash out that’s actually leaving, in the week it moves. My free 13-week cash flow forecast runs three versions at once: the good, the bad and the ugly. Ask the ugly version one question: are we still okay if the worst happens? If not, you’ve found the problem while there’s still time.
2. Chase what you’re owed, today. Every invoice over terms, a phone call, not an email. Then look at terms: deposits on new work, shorter terms for new customers, payment on completion rather than 30 days after.
3. Move what you can. Talk to suppliers before you miss a payment, not after. Ask for time on the big ones. Agree a plan with HMRC on a tax bill if you need it; they’d rather have a plan than a default.
4. Stop the leaks. Every subscription, every “we might need it” overhead, every job you’re doing at a loss. Cancel, renegotiate or stop.
5. Price. The fastest lever. If margins are the cause, a small rise on the right customers brings cash in within a month. The price increase calculator shows how many customers you could lose before the rise costs you anything.
6. Arrange the facility before you need it. An overdraft, invoice finance or a short-term loan is much easier to get when the forecast shows you’ll be fine. Banks lend to businesses that can show them the ugly version and the plan.
7. Make the decision you’ve been putting off. The hire you shouldn’t have made, the customer who pays late and complains, the premises you’ve outgrown. Cash problems are usually a decision problem in disguise.

The habit that stops it coming back

A forecast you build in a panic and never open again is worth nothing. The fix is boring: fifteen minutes, same time every week. Update last week’s actual figures, roll the forecast forward a week, run the ugly version, decide anything that needs deciding. That’s it.

Run like that, the 13-week forecast becomes the crystal ball for the business. A quiet month shows up eight weeks before it’s a problem. A VAT bill is a line in a spreadsheet, not a phone call from the bank. And decisions, which are what cash flow problems really are, get made while there’s still time to make them.

I run three versions of my own, every week, in businesses I own. It’s not an accounting exercise. It’s how I know what I can decide.

When it’s more serious

If the ugly version goes below zero and you can’t see a way to bring it back by chasing, moving, cutting or pricing, talk to your accountant now and, if the business can’t pay its debts as they fall due, take advice from a licensed insolvency practitioner. Directors have legal duties once a company is insolvent, and acting early keeps more options open, including rescue. It’s a conversation nobody wants, and having it a month earlier is nearly always better.

Questions owners ask

What’s the difference between cash flow and profit? Profit is sales minus costs, recorded when invoiced. Cash flow is money in minus money out, recorded when it moves. A business needs both, and they can go in different directions for months.

How much cash should a small business keep? Enough to cover the worst realistic quarter in your forecast, with the tax bills in it. The ugly version tells you what that is for your business; a rule of thumb for someone else’s doesn’t.

Should I use invoice finance to fix cash flow? It can bridge the gap between invoicing and being paid, at a cost. It fixes the symptom. If the cause is late payers or thin margins, fix those too or you’ll fund the problem forever.

Can a business be profitable and still go bust? Yes, and it happens most in growing businesses. Running out of cash is what closes companies, not running out of profit.

I’m Dr Lewis Haydon, a business coach and mentor in Birmingham, UK. I own and invest in businesses, and I work with owners of established businesses from about £250k turnover, scaling to £1m and on to £20m, on the numbers that decide whether the business pays them: cash, margin, price and the decisions behind them. If your ugly version looks ugly, bring it to a virtual coffee and leave with a straight answer on what to fix first.