Company Cash Flow Problems: Causes, Warning Signs and Solutions

Yes. Profit and cash flow are not the same thing.

A company may record a profit but still have insufficient cash because:

• customers have not yet paid their invoices;
• money is tied up in stock or work in progress;
• significant costs must be paid before a project generates income;
• the company is growing faster than its working capital allows;
• loan, lease or tax repayments are absorbing available cash; or
• one large customer has delayed or disputed payment.

The reverse can also happen. A company may temporarily maintain cash by borrowing while its underlying trading remains unprofitable.

Directors should therefore look at profit, available cash and future viability together rather than relying on the bank balance alone.

Common causes include:

• Late customer payments: The company makes sales but does not collect the money quickly enough.
• Falling sales: Revenue reduces while rent, wages and other fixed costs remain.
• Low margins: The company generates sales but retains too little cash after delivering its products or services.
• Rapid growth: Additional stock, materials, equipment or employees must be funded before customers pay.
• Excess stock: Cash is tied up in products that cannot be sold quickly.
• Seasonal trading: Income varies throughout the year while many costs continue every month.
• Unexpected costs: Equipment failure, repairs, legal disputes or lost contracts create an unplanned demand for cash.
• High debt repayments: Existing borrowing consumes money needed for normal trading.
• Tax arrears: VAT, PAYE or Corporation Tax liabilities build up because cash has been used elsewhere.

Identifying the actual cause matters. A new loan might bridge a delayed customer payment, but it will not correct an unprofitable business model.

Possible warning signs include:

• regularly paying suppliers late;
• missing VAT, PAYE or Corporation Tax payments;
• struggling to meet payroll;
• using new borrowing to repay existing borrowing;
• direct debits being returned unpaid;
• constantly operating at the overdraft limit;
• losing access to supplier credit;
• receiving final demands or debt collection letters;
• creditors starting court action; or
• having no reliable forecast of upcoming payments.

One warning sign does not automatically establish insolvency. Several recurring signs, however, may indicate that the company’s problems are becoming structural rather than temporary.

Prepare a list of payments due over the next few weeks, including:

• wages;
• VAT, PAYE and Corporation Tax;
• rent and utilities;
• essential suppliers;
• loan and finance repayments; and
• insurance and other operating costs.

This will show when the most serious shortfalls are likely to occur.

Ask whether normal trading will generate enough cash to meet:

• continuing operating costs;
• current tax liabilities;
• revised creditor payments; and
• any new finance repayments.

If the company can only survive by continually increasing its borrowing, the underlying problem may not be a temporary cash-flow gap.

Finance may help where the company remains viable and the shortfall is temporary.

Possible forms of funding can include an overdraft, business loan, invoice finance, asset finance or refinancing existing borrowing. Availability and suitability will depend on the company’s circumstances and the provider’s terms.

Before taking on finance, directors should consider:

• the interest and fees;
• the repayment period;
• the total amount repayable;
• whether assets will be offered as security;
• whether a personal guarantee is required; and
• whether the company can afford repayments if income is delayed again.

New borrowing should not be used simply to postpone an unavoidable insolvency.

If several existing finance commitments are causing the pressure, read our guide to business debt consolidation.

The appropriate option depends on whether the company can recover.

Possible routes include:

• Informal creditor agreements: Revised payment terms may help where the problem is temporary.
• Debt restructuring: Existing liabilities may be renegotiated or refinanced where the underlying business remains viable.
• Company Voluntary Arrangement: A CVA can allow an insolvent but viable company to propose an arrangement with its creditors.
• Administration: Administration may be considered where rescue or a better outcome for creditors than immediate liquidation appears achievable.
• Creditors’ Voluntary Liquidation: A CVL may provide an orderly closure where the company is insolvent and recovery is no longer realistic.

Our Business Debt Help guide provides a broader comparison of the available options.