Cash flow how to overcome your liquidity problems

Cash flow is one of the most important terms for anyone who owns a business. Cash flow is often confused with revenue or transactions, but it actually describes all the money flowing into your business, and equally all the money flowing out. As an entrepreneur, it's critical to pay attention to your cash flow. Because from time to time liquidity problems can occur in every company. However, there are ways to address these challenges to keep your cash flow healthy and your business running as usual.

How to calculate my cash flow?

The first step to solving liquidity problems is to know how to calculate the cash flow itself. It's straightforward:

Cash flow = net income + depreciation and amortization – capital expenditures – change in working capital

The income can be sales, investments or bank loans. Expenses include staff salaries and operating costs.

Forecasting your cash flow is a great way to better understand how exactly financial resources are flowing in and out of your business. Here's how to identify times when you might experience cash flow shortages in the future. This will ensure you don't spend money you don't have, and you can seek financial support elsewhere in a timely manner. Unexpected and unforeseen costs are part of running a business and are usually unavoidable. However, accurate forecasting can help you better predict and manage your cash flow month over month. Read more about what a cash flow statement is and how it can help your business succeed.

Reasons of liquidity problems

Challenges within the company

If your sales stall or your sales forecast was too optimistic, it will affect your income. That, in turn, affects your cash flow. A drop in sales can be caused by external factors such as market changes or internal factors such as low marketing activity or poor maintenance of business contacts.

Rapid growth

Making more money usually means spending more money for a business. As you grow, your operating expenses can increase because:

  • Hire more employees
  • Modernize your systems
  • invest in new software and equipment for your business
  • Or replenish your stocks.

Excessive spending

You are spending more money than is coming into your business? Then you should identify what is causing the high costs and try to reduce or eliminate them altogether.

Late payments

Invoices that are paid late can have a negative impact on your cash flow. This is especially the case if you have incurred costs to complete the order. Receiving payments due on time is critical to avoiding cash shortages.

Effects of weak cash flow

Poor cash flow can have a negative impact on your business – but only if you don't know how to deal with it. Effects of cash flow problems can include:

  • Damage the relationship with suppliers waiting to be paid
  • Orders and projects have to be turned down due to lack of funding
  • Employees have lower morale and are more likely to leave your company
  • Stress and anxiety
  • Deterioration of your credit rating when due payments are not settled
  • In extreme cases: Insolvency

But don't worry – by proactively managing your company's finances, you can generally avoid these impacts. That way, if you identify a problem in your cash flow, you can act immediately.

Here's how you can improve your cash flow

Liquidity problems are the most common cause of business failures. Knowing how to identify common reasons for poor cash flow can help you ensure that your business always has sufficient liquidity. Keeping track of what is flowing in and out of your accounts is critical in this regard. It's also a matter of finding the right tools to help you manage and improve your cash flow. For example, one such tool for your financial management is offered by Friday Finance.

Actively monitoring and managing your business operations and processes is a great way to manage your cash flow. Maintain excellent supplier relationships during your resource and materials procurement process, which can lead to better terms and orders. When developing your business, don't be afraid to experiment with changing your selling prices. Review your inventory and remove poorly selling products from the range. Study your customer list to determine if late paying clientele are affecting your cash flow.

How iwoca can help with liquidity problems

In a company it is quite normal to have liquidity problems from time to time. However, it is crucial how you deal with it. With good cash flow management, you can manage liquidity shortages or even prevent them from occurring in the first place. We've developed our Flexi Loan to help you do just that.

A flexi-loan is ideal for any entrepreneur who wants to better manage their cash flow or needs additional financial support to grow their business. With our flexible loans you can ensure your business success easily and quickly. Read more about how our corporate loan works and how you can easily apply for it online.

If you have any questions or suggestions about our product or processes, our friendly and experienced team will be happy to assist you. Simply call us on 069 / 94323020 or contact us by email on [email protected] or in the webchat. We are there for you from Monday to Friday between 8 a.m. and 7 p.m.