When It Comes to the Financial Health of Your Business, How Healthy Is Your Cash Flow?

Cash Flow Problems – a Definitive Guide
Startup business

Table of Contents

In this section, I will share with you everything you need to know about cash flow problems so that you can build self-awareness, stability, and sustainability in your business.

I will cover these areas.

  • When does a business have a cash flow problem?
  • Five biggest cash flow mistakes leading to cash flow problems
  • Top ten common causes of cash flow problems
  • Four not so obvious causes of cash flow problems
  • Ten sequential steps to avoid cash flow problems as a new business owner
  • How to solve cash flow problems as an established entrepreneur or existing business

Let’s dive in.

When Does a Business Have a Cash Flow Problem?

Let’s park your revenue, costs, and expenses to the side to understand this.

You have a cash flow problem when your cash outgoings exceed cash incomings. If the pattern continues for a few months, you have a severe cash-flow problem.

Is it common?


Whether you are running a business that operates 12 months a year or a seasonal business like selling ice cream in the summer and selling Christmas merchandise during Christmas, you could have cash flow problems if you are not careful.

The cash flow business – meaning you get paid instantly at the point of sale like a retail or dental business – can also face cash flow problems.

It’s not the sector or seasonality but the structure, systems, and processes related to cash flow that lead to problems.

Can a Profitable Business Have Cash Flow Problems?

There is a difference between a business’s profitability and cash flow. A business may be profitable and still have cash flow problems as cash may be tied up in debtors and stocks. If the cash is tied up in debtors, stocks, or both, you may not have enough cash to pay the bills, leading to cash flow problems. If you want to go deep in this area, click here to understand the difference between cash flow vs. profit.

How Many Businesses Fail Due to Cash Flow Problems?

According to Score.org, 82% of businesses fail because of poor management or understanding of cash flow, not because of lack of sales. Such a high percentage of business failure due to cash flow-related problems is frightening. So pay attention to details when it comes to cash flow in your business.

How To Identify Cash Flow Problems?

If the business constantly has a negative cash balance at the end of the month, the sales are going up.

In case of a cash flow problem, you’ll find cash outflow consistently more significant than cash inflow in your cash flow statement. At times owners fund such a business to neutralize this negative balance or use bank funding. This is not the sign of a healthy business, and if it continues, the business will go down because owners or banks can’t fund a business for long that has cash outflows more than inflows for a long time.

How Can Cash Flow Problems Lead to Business Failure?

It is one of the most popular questions I get asked, and I posted my answer on Quora. Check it out here.

But the question now is what leads to the causes of these cash flow problems in the first place.

I will share five common cash flow mistakes entrepreneurs make that lead to cash flow problems.

Five Biggest Cash Flow Mistakes Leading To Cash Flow Problems

There are five common cash flow mistakes entrepreneurs and small business owners make.

1. Overestimating Sales

When a business overestimates sales, it can lead to cash flow problems. When sales are overestimated, associated costs are absorbed sometimes even before the sales are expected to happen.

For example, a business could estimate making an extra £100k monthly for the next three months. So, the business hires two salespeople and one admin person. That’s a salary of three people to swallow before even the extra sales happen.

When extra sales do not happen, the business has to operate with a new level of incremental overhead, which squeezes profit margin. Low-profit margin means low cash left balance. In such a situation and there is hardly any room for more mistakes.

2. Impulse Expenses

3. Not Using Cash Flow Software

You can avoid so many of your issues just by operating cash flow software. Every penny that is spent and taken in can be logged. It’s not impossible, but it does take some effort to do until it becomes a habit of those involved and integrates into operations.

4. Not Building a Buffer

Many entrepreneurs do not create a cash cushion. They should. One can use a cash buffer to spend the next time something unplanned occurs, keeping your cash flow balanced. Keeping cash on hand helps avoid paying for a negative cash flow statement one day.

Can you imagine a situation having some money left in the bank account and then paying taxes, which empties the bank account? Consequently, you are worried about how you will pay other bills, staff salaries, etc.

5. Being Passive About Money Owed

When you first start in business, some customers may not take you seriously. Even then, you should chase invoices and make sure the money you are owed is not just paid but paid to you on time. Stop being passive about the money owed to you because it won’t hurt those who owe you. It will hurt your cash flow statement.

Make sure you are not making any of these mistakes, and chances are you’ll stay clear of cash flow problems.

Are you wondering what else causes cash flow problems?

If yes, you’ll find yourself asking questions like the following:

What are the causes of cash flow problems?
What causes poor cash flow?
How can overtrading cause cash flow problems?
What are the dangers of overtrading?
What factors affect cash flow?
How can cash flow affect a business?
How do sales affect cash flow?
How does cash flow affect businesses?
What can hurt your cash flow?
Why can cash go down even when sales are up?

You’ll find answers to these questions as I share causes of cash flow problems, some common and others not so common – and how to solve each of these problems.

Let’s start by looking at the common causes of cash flow problems.

Top 10 Common Causes of Cash Flow Problems

To make it more useful for you, I have added solutions to each of these cash flow problems that I have shared below.

1 | Lack of Sales

One of the most common causes is low sales.

Most businesses try to fix this by looking for new customers. This results in further costs because you need to advertise and market new customers.

If you are strapped for cash, encourage your customers to buy more by offering a win-win deal.

2 | Slow-Paying Customers

Slow-paying customers affect, even kill more businesses than one can imagine. In the UK, 59% of surveyed companies said they are impacted negatively by late payments, Bacs report.

In the same survey, SMEs said their late payment burden on an average stood at, and £50,000 was the maximum they could bear. That put them close to bankruptcy.

More than three-quarters of SMEs are forced to wait at least a month beyond their agreed terms before getting paid.

It affects the well-being of business owners because they bear this burden is to take a cut in the salary to ensure that they have enough cash inside the business. They also rely on overdrafts to make ends meet.

It does not end with owners. It delays staff salary payments and takes care of other fixed costs and regular bills. And, for no fault of their own, they even have to wait to pay their suppliers.


If your customers are paying slow, remind them that the invoices are due. Set up automatic reminders by using accounting software when the invoices are not paid by the due date.

3 | Poor Collection From Customers

Customers are not the only ones to slack. There are times when companies don’t issue invoices on time. Strange but true. And, if they send invoices, they almost chase up invoices.

If you are in this group, then understand that you bear the cost of sale with every sale. So if you don’t collect what your customers owe you, it will be worse than if you never made the sale. Because in case of no sale, you won’t have incurred the cost of purchase.


If you are experiencing poor cash collection, have credit control in place. Every week or so, establish the status of your invoices and follow up with debtors if they haven’t paid by the due date.

4 | High Fixed Costs

To survive, your business needs more cash to flow in than what goes out. Without this balance, your business won’t survive in the long run.

One of the most common causes of high cash outflow is high fixed costs. Watch out for these.


Running a business with a high level of fixed costs means there is a tiny margin of profit. So, operate your business as lean and mean as possible to reduce fixed costs.

5 | Prices Are Too Low

Low pricing is seldom a good strategy unless you are someone like Walmart, working at a massive scale. So if you are a regular small business, know that low pricing is a race to the bottom. There will always be someone willing to price lower than you.
Another problem with this approach is that your costs will increase with time, and your low-paying customers will not be happy if you pass on that increase because they came to you for a low price. This will further squeeze your cash flow.


If the prices are too low, update the prices to increase the cash flow margin. Be sure to check what your competitors are charging when updating your prices to stay competitive.

6 | Giving Customers Too Generous Payment Terms

Businesses that offer Net-90 or Net-60 payment terms are most likely to face cash flow problems because they need twice or thrice the cash of a business that runs on net-30 terms.

Long payment terms are like giving unsecured loans to your customers where you don’t even get an interest payment. And this is the money you could have invested in growing your cash flow.


When you offer too generous payment terms, you act as a bank to your customers. You, in a way, fund their business. I understand you want to get the business, but strike a balance between selling and getting paid.

7 | Overtrading in Times of Fast Growth

When your business grows fast, you need to invest in staff, stock, devices, and equipment to serve the growth that you anticipate.

You invest before you see cash flow and don’t have the working capital to match that growth, so your cash flow takes a hit.


To stop cash flow woes while growing your business fast, remember stability is more important than scale. Only scale the business when your business is stable and has a few months cash cushion to sustain the business growth.

8 | Customers Don’t Pay Resulting in High Bad Debt

What happens if your biggest customer goes down or can’t pay because of market conditions? What if this happens with two of your customers?

It can put your business in jeopardy.
That’s why it is wise to spread your revenues across several customers and not rely on one or two big customers.


It is important to do a creditworthiness check on your customers. Sales do not mean anything if it doesn’t result in cash collection. This way, you’ll work to avoid customers who don’t pay.

9 | Cash Tied Up in Old or Wanted or Slow-Moving Stocks

This situation is common with those dealing in fast fashion or electronics. Still, it can happen with businesses in other industries also.


To avoid this situation, keep a close eye on market trends and demand fluctuations so that you can sell off your stock as soon as possible.

10 | Investment in Other Businesses Without Leaving Sufficient Cash for Your Main Business

One of my dental clients took out cash from the business to invest in properties. He believed future cash flow would be enough to cover the day-to-day running of the business. When the business didn’t perform as expected, he ran into cash flow problems.


If you will take cash out from the business for investment, ensure cash left covers at least expenses and tax payments for the next three months.

Next, I will share with you four not-so-obvious causes of cash flow problems, which are often overlooked and lead to cash flow problems.

Four Not So Obvious Causes of Cash Flow Problems

1 | Spreading Your Time and Attention Across Too Many Products or Services

Are you in a situation where you don’t find much cash left for you despite working hard at the end of the month?

Then perhaps, you are spending time pushing a product that does not add much cash flow or maybe you are spreading your attention and resources to sell multiple products without knowing your top 3 cash generators. Without further delay, find your top cash generators and put all your energies there, and they will serve you well.
See, it’s no good if you go out there and work long hours and put all this energy into your business without any significant return.

2 | Low or No Marketing Investments in Your Business Because of Lack of Confidence in Your Marketing


It doesn’t matter how good your product is if the right prospects don’t know it exists.

To make your prospects aware of your product, invest in marketing.

If you are investing in marketing but not seeing much results, then track key metrics depending on the stage of your business growth.

In the early days, you look at brand awareness metrics like views and visits, and once you evolve, you look at metrics like email options and leads generated by your marketing.

When I suggest this to entrepreneurs, many of them ask me, “Shishir, I don’t know what to track and how to track my return on marketing investment?”

I tell them, “What gets measured gets done to work with someone, an expert, who knows.”

3 | Playing Solo and No One To Work With You on Growth


Bill Gates and Paul Allen started Microsoft. Steve Jobs and Steve Wozniak started Apple.

Even in the case of Facebook, Mark Zuckerberg is the founder and CEO. But he has the perfect partner in Sheryl Sandberg.

It takes two to tango.

And, there is a reason it often takes two founders or key people to start and grow highly successful companies. Because growing a company is a highly emotional and unpredictable journey. Much like marriage is.

And, when you come up against a challenge, you need someone to discuss those with, someone who has been on the journey with you, understands those challenges, and is empathetic.

This person keeps you away from two giant killers of business – what you don’t know and can’t see.

A part accountability partner, a coach, and someone with an opposite unique skill set that compliments yours.
Someone who runs day-to-day while the other focuses on growth. Someone who runs the backend while another is the face of the business.

Right brain to your left brain. One who understands cash flow and accounting, financial risks, and returns and creates magic with your marketing prowess.

So, the cause of cash flow problem number 3 is possibly playing solo, and there’s none to work with you on your business growth.

4 | An Underperforming Team


Amazon generates around $2 billion in free cash flow per month because it is an efficient business, generating more than $2 million in average revenue for each employee.

And there are lots of smaller businesses and startups in the world that are equally efficient, like Basecamp, which does #2 million per employee. A 50 people startup, Ahrefs does $1 million for each employee. There are many more like that.

One can argue that revenue and resulting cash flow are a function of the product. Still, it is also true that a superstar marketer, developer, or salesperson can change the trajectory of your business.

So when you do work with another talent, work with superstars and not with uninspired slow movers who can pull your business and cash flow down.

Business owners also face cash flow problems based on what stage of their business journey they are at. That’s why I am sharing cash flow problems that new entrepreneurs face. After that,

I’ll share cash flow problems established entrepreneurs face.

Let’s start by understanding the cash flow problems that new entrepreneurs face and how to solve them.

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Ten Sequential Steps To Avoid Cash Flow Problems as a New Business Owner


Are you a new entrepreneur and constantly worried about cash flow?

Then this section is for you.

Because in this section, I’ll share how to solve cash flow problems as a new entrepreneur and avoid being part of 50% of business owners who see their business fail in the first year because of cash flow problems.

I will share ten advanced cash flow strategies in a sequential order that you can use to solve your cash flow problems as a new entrepreneur.

I have learned these through my own experience through my transition from an employee into an entrepreneur in July 2009 and through my work with ambitious entrepreneurs as a financial coach running businesses from £40k to £40m in revenue.

Here are these ten cash flow strategies.

  • Choose a High Margin Business Sector
  • Seek Alternative Sources of Funding
  • Set Up a Limited Company
  • Set up Cash VAT system
  • Structure Your Business for Generating Cash Flow
  • Set up a Cash Flow Forecast
  • Use Bank Overdraft Facility
  • Differentiate costs vs. investment
  • Shorten Accounts Receivable Cycle
  • Pay Suppliers Just in time

So, let’s dive in and look at each one of these in detail.

1. Choose a High Margin Business Sector

Business is a game of margins.

And margins vary as per business sectors.

That is why a new entrepreneur needs to choose the business sector wisely. This is the untold SECRET of cash flow-rich entrepreneurs.

There are no set rules for optimum margin.

I’d recommend choosing a business sector that will help generate at least 15% profit after paying yourself salaries. Otherwise, you will always be struggling and juggling with cash flow.

Most entrepreneurs are in a rush to get started. They choose businesses with a low barrier to entry. Such businesses usually are low-margin businesses. That’s why they start running empty at the end of every month.

If you are stuck in such a business, get out as soon as you can.

Don’t follow your passion if your passion takes you to a low-margin business. Follow margins and efforts. Go after sectors where margins are high and where you can become better by putting in an effort.

Software, consulting, and sectors that lean on emerging trends like AI, Machine Learning all offer high margins.

My passion is playing guitar, which I still do to feed my soul. But I am good with numbers, so I became a financial coach.

Let me help you understand better with an example of two of my clients.

Company A is in the travel business. It does £7.2m in revenue with 8% gross profit and net profit of just £14,579.

Company B, a marketing agency, does £1.2m in revenue with 75% gross profit and £495k in net profit.

Because of high margins, company B wins over company A big-time with 33x net profit despite having 1/6th the revenue of company B.

In such a situation, and when cash is tied up in debtors and stocks, company A will always struggle for cash flow.

2. Seek Alternative Sources of Funding

You can sell equity in your business to raise debt-free investment.

Your business does not need to be huge or in a new age industry. There are sector-focused angel investors that are always on the lookout for getting good deals. It takes some effort, and also you should have something that differentiates you from other businesses. But you can try this approach.

Like bank overdrafts, raise funding when you don’t need it. And, start long before when you need it. So, if you want to cash in October, start in March because it takes that long.

If you want to take this route, look at the fundraising advice YCombinator offers.

You can even get funded by your customers by running a Kickstarter campaign. This approach has dual advantages. You’d not only have the funding to solve the cash flow problem, you’d also have proved your concept.

If you use this and find supporters, be proud of yourself and pat yourself on the back.

3. Set up a Limited Company To Pay Fewer Taxes Rather Than Self Employment

In business, it’s not about how much cash you generate. It’s about how much cash you keep.

Setting up a limited company will provide you with tax incentives to pay lower taxes than self-employment. This will give you greater flexibility to manage cash flow in the business.

E.g., In a limited company, you pay tax on profits. If the profit is zero, then the tax on zero is zero.

You only pay personal tax when you extract the profit out from the company. Low profit extraction i.e. dividend payments = low tax to pay = low cash outflow. This helps to solve cash flow problems. You have greater control over when and how much to take out, ensuring business and personal survival.

Imagine you only have 15k in a bank account as a self-employed professional, and you have to pay 12k tax.

Whereas as a limited company, you only paid yourself a basic salary to use personal allowance and rest by dividends just enough to cover your survival. This means you paid the tax in the most tax-efficient way and paid it at a time favorable to you.

If you are self-employed, then you have to pay tax on profit.

More tax payments = more cash outflow.

Which could lead to cash flow problems.

So set up a limited company to take advantage of entrepreneurs’ tax reliefs when you sell.

4. Cash VAT

When you set up a limited company, you should register for sales tax on a cash basis. This means you pay sales tax when you have received the payment from your clients, and you claim sales tax when you have paid your suppliers. This way, you will not have a problem with cash flow because of the timing of payments.

One of my marketing agency clients was operating in a standard sales tax system, and he had to pay for sales tax even though the agency’s clients hadn’t paid, which had a massive negative impact on cash flow.

Why try to solve a cash flow problem when you can avoid it?

5. Structure Your Business to Avoid Cash Flow Problems

Do you know the most common question new entrepreneurs ask me?

It is this: Shishir, why doesn’t my profit balance look like my cash flow balance?

These entrepreneurs are full of energy and are making sales and profit, but they don’t have enough cash to pay the salaries, bills, or personal survival? They cannot pay the bills with their profit. They need cash.

This is not a hopeless situation.

They can solve their cash flow problem by structuring their business model of cash in and cash outright.

It will work for you if you are that entrepreneur.

Let me explain.

One of my clients, who started his business in 2005, is currently doing £8.6m in annual revenue. He sells luxury sofas. His business model is Collect Now, Pay Later. His customers pay first. Then he pays suppliers. By doing this, he avoids cash outflow.

He applied in his business that sells physical goods. You can use it even if you sell services.

As an entrepreneur, you are a problem solver. You solve your customer’s problems. And, if you are alleviating your customer’s big pains, they will happily pay you upfront because they want to get rid of their pain more than they want to keep their cash in their account.

You can ask for a deposit to cover your cash outflow and then ask for installments, or you can get fully paid upfront before you start work. Then you pay your bills in line with the cash you have received.

Just like this model has worked for this luxury sofa retailer for over 15 years, it can also work for you and solve cash flow problems before it even arises.

6. Cash Flow Forecast Plan – Failing To Plan, Equals Planning To Fail

Imagine you are driving on the road. If you just look ahead of yourself, then chances are you will not notice the possible hazards in front of you because you are in foveal vision.

The further you can look ahead while driving, the better you can tackle any accident threats. And, if your vision is limited, you may meet with an accident.
It’s no different in business. Failing to plan for cash flow generation will lead to the “ Oh Shit, I don’t have cash for this, what do I do” moment.

You can avoid such moments and eventual business failure by having a cash flow forecast. This forecast will help you see the cash flow problems waiting to happen in the near future, and save you.

7. Use Bank Overdraft Facility

In 2007, I worked with two founders who set up an SEO marketing agency. They started the business in the basement of one of their parents’ houses. Their business took off, and soon, their revenue increased from £19k a month to £75k a month. To meet the demand, they hired more staff and moved on to bigger premises.

Despite increased expenditure, do you know what kept them going during this growth phase? The good old overdraft.

It kept their business alive for nine months. And, by that time, their cash flow from revenues started serving their growth.

The best time to ask a bank for an overdraft facility is when you don’t need it. So get it while things are good in business. And use it as a cushion to solve cash flow problems. This is helpful because every business goes through cash flow challenges at one point or another.

8. Cash Flow Mindset

Differentiate costs vs. investment and prioritize spending in the business.

It doesn’t matter if you are a newbie or an established business – there is always a shortfall of cash flow in the business or at least in the entrepreneur’s mind. Because most entrepreneurs, even when they are cash-rich, prefer to have another zero added to their bank account to feel more safe and secure about their cash flow?
So use cash flow wisely.

Cash is the energy fuel in the business.

It’s not about what cash can buy. It’s about what cash can earn in the business.

Have you heard the expression, it takes money to make more money?

If you have – then spend more on investments than costs, you can solve the cash flow problem.
I have never come across an entrepreneur who said to me, “Shishir, I am pleased with my cash position, and I don’t need to solve cash flow problems.”
Even when the entrepreneur doesn’t have a cash flow problem, she wants more cash flow for the same level of sales – and this is a problem.

So, when you spend cash, make sure you know the difference between costs and investment. Spend it on cash-generating activities such as:

Buying a company car which is a cost, vs. developing a bespoke system which is an asset and investment as it adds value to the company.

Flying on business class is a cost vs. hiring a consultant who can fix bottlenecks in the business, which is an investment.

9. Shorten Accounts Receivable Cycle

Do you want to know one of the easiest ways to solve cash flow problems?

Just shorten accounts receivable.

You need to have effective credit control in place.

Have a system to send invoices as soon as work is completed. Then confirm that your customer has received the invoices. Follow up to check with them and ensure that your invoice is included in their payment run.

This way, you shorten accounts receivable cycles.

One of my clients who runs a marketing agency in London had a £15k overdrawn account. He said to me, “I need to get more sales, Shishir, as my cash is so low.”

I told him, “No, Steve, you need to focus on accounts receivable to collect the payments right now.”

His business went on from £15k overdrawn to £81k cash positive in 3.5 months as most of the overdue clients paid and some paid within ten days.

10. Pay Suppliers Just In Time

Are you aware of the Japanese ‘Just in time’ management philosophy?
You can apply the same cash management system in your business.

To do it, when you receive an invoice from the supplier with net-30 terms, which means the invoice has to be paid in less than 30 days, pay just-in-time on the 29th or 30th day.
I know, as an entrepreneur, you want to get things done and keep a good relationship with the people you work with. I get that and respect it. If the supplier has given you the flexibility to pay within 30 days, you don’t have to pay when you receive the invoice.

Now, let’s start by understanding the cash flow problems existing businesses face and how to solve them.

How To Solve Cash Flow Problems for an Established Entrepreneur or Existing Business

Are you an established business and worried about cash flow?

Are you looking for solutions to your cash flow problems?

Then I am sharing how to solve cash flow problems as an existing business owner and avoid being part of 82% of businesses that fail because of cash flow problems.

I will share with you five cash flow problems that businesses that have been running for a while face and solutions to each of those problems.

I have learned these through my own experience through my transition from an employee into an entrepreneur in July 2009 and through my work with ambitious entrepreneurs as a financial coach running businesses from £40k to £40m in revenue.

So, let’s dive in.

So, what are the main causes of cash flow problems?

Here are some obvious and not so obvious causes of cash flow problems.

1 | Low-Profit Margin

In 2018, a business with $100,000 in revenues had a net gross profit margin (after variable expenses) of 40% and a net profit margin (after fixed expenses) of 15%.

In 2019, the business increased its sales by 10% to $110,000. Its net gross profit margin dropped to 36%, and net profit margin dropped to 9%. To $9,900 and so there’s a drop of $5100 profit.

Revenue Net Gross Profit Net Profit
2018 $100,000 40% 15% ($15,000)
2019 $110,000 36% 9% ($9,900)

Such change is not unusual because as a business grows, the cost of sales also goes up. But it is not healthy. On a small revenue base, a 9% profit margin is not much for making investments in business growth.

The owner of this business can’t run an additional marketing campaign because if they run it and don’t generate enough sales first, their small profit may turn into a loss, resulting in negative cash flow.


To solve this problem of low-profit margin increase the prices. It will, of course, be easier if your business has a brand that customers trust. They come to you to solve a pressing problem they have and know you can solve that problem.

Increase your price to a point where you can return to earlier profit margins, or that allows you to invest in growth.

2 | Have to Reduce Selling Price

This can happen due to fierce competition and lead to low profits.

Let’s say your sales price is $100 per unit. Now you have to drop it to $90.

Earlier, you were making a $15 profit per sale. Now you are making only $5 per sale as net profit because your costs of sales and expenses remain the same.


One of the things you can do to offset this is to increase your average order value (AOV).

You can find inspiration for this in McDonald’s “Would you like fries with that?” line. This prompt plays a big role in helping McDonald’s serve about 9 million pounds of fries globally—per day.

So what you need to do is increase the average order value in your business by finding your version of ‘fries,’ or even better, add ‘fries’ and ‘shake.’ So instead of one, you can add sequential prompts to buy two more products for someone who orders your $100 product. This will give an instant boost to your profits and improve your cash flow.

3 | Limited Funds for Growth With Cash Tied Up in Debtors, Stock

For businesses that have been running for a while, there comes a time when your business grows faster than before. As a result, you serve a lot more customers. In that case, it often happens that many of those customers don’t pay on time. These are the debtors in your business. And, when debtors increase beyond a point, you make sales but no longer have enough cash flow to cover the bills to pay.

The delay can also happen when you offer customers 30, 60, or 90 days payment terms. In that scenario, you make the sale today, but you won’t be paid until 30, 60, or 90 days later. So, you’ll have a cash imbalance in your business because the money coming and money going won’t match up. Your fixed costs will keep on piling, and you will continue investing in stock to deliver the product to new customers.


Get external funding to solve this problem.

This works great for businesses with a proven track record.

Funding can be in the form of a bank loan, overdraft, or equity funding.

An existing business can reach out to banks for a loan and overdraft because they have a track record and proof of sales to show. How long you have been in business and how well you have repaid your previous bank loans will also have a bearing on the terms you get from your bank. This will give them confidence that they’ll get their money back, and you will be able to get a loan at lower interest rates.

If you are a startup with existing revenues and customers, you have a chance of getting better terms from equity partners. That means you’ll have to part way with smaller equity to get investment from investors.

With this cash infusion, you can get rid of cash flow problems and keep your business growing. It will be wise to fix what causes the cash flow problems in the first place, like really long payment terms, and go ahead with shorter cash receivable cycles.

4 | Cash Extracted to Invest in Other Business Resulting in Working Capital Cash Crunch

When things are going well in your business, there is a temptation to extract cash and invest in a second business. The cash flow in one business may be able to support one business. But it may not support both businesses, one of which is yet to generate enough cash flows.

This happened with one of my clients. He wanted to invest in a new business and took cash from his existing business, resulting in a working capital crunch. The other business did not perform as well as he expected. The working capital crunch in his existing business had him worried about cash flow problems.


Whenever you have an opportunity to invest in a new business and plan to use money from your existing business to make that investment, make sure that you have at least six months of capital cushion for these two businesses. Then only do it. That way, you don’t miss out on the investment opportunity while also ensuring the sustainability of your existing business.

5 | Loss of Big Contracts Leading to a Significant Drop in Cash Flow

This problem arises when a business loses one or two of its biggest contracts. When a business relies on serving a few big customers, one or two big customers can account for 50% of cash flow.

This can happen unexpectedly due to a market condition, a crisis in a particular industry, or the client going bust.

Now, if your business is the one serving such customers, you’ll already have existing infrastructure built to serve them. If such a client parts ways with a 30-day notice and 50% of your revenues are wiped, you’ll find it tough to cut costs to match a decrease in revenue. Like you can’t fire all your staff at once.

Even if you did, you’d have to give them a notice or a matching amount to cover the notice period.

On top of that, it is not a good sign, because the word spreads, and when you need good people, no one will want to come and work with you again because people will know there is no security and your business will be seen as taking advantage of someone when you need it the most and throw away later.

And you can’t get rid of leased space, even if you want to, because of your contract with the landlord.


To stay clear of such problems, don’t rely on a few high-paying clients and have more than one revenue stream, so that if unexpected events happen. One or two big clients leave you, then you don’t have to face a cash flow crunch and force you to take drastic measures.

Here is a recap of 5 common causes of cash flow problems that an established entrepreneur faces and how to solve these cash flow problems.

Cash flow problem
How to solve it
Low-Profit Margin
Increase Price
Have to Reduce Selling Price
Increase Order Value
Limited Funds for Growth With Cash Tied Up in Debtors, Stock
Get Funds From Banks or Investors
Cash Extracted to Invest in Other Business Resulting in Working Capital Crunch
Only Do It if You Have 6 Months Cash Flow Cushion
Loss of Big Contracts Leading to a Significant Drop in Cash Flow
Reduce Reliance on a Few Clients and Diversify Revenue Streams


In this section, we looked at cash flow problems in detail. What are the causes that are common, not so obvious causes, mistakes entrepreneurs make leading to cash flow problems and possible solutions to them?

You have given yourself an excellent opportunity to mitigate the cash flow problems by going through them.

Every business, at some stage, goes through a cash flow rollercoaster and problems. It’s not the question of if you will have cash flow problems. It’s the question of when you will have cash flow problems. So it is better to be self-aware of your cash flow situation and take action accordingly.

Remember, when you Learn to respect cash. It will respect you back.


Shishir Khadka, qualified as a chartered certified accountant in 2009. He is the creator of cashflow hub– the world’s most comprehensive cash flow resource online and is one of the UK’s leading cash flow specialist who helps busy business owners and entrepreneurs generate more profit and create consistent positive cash flow without over relying on getting new sales.

He has delivered a masterclass to a global software Zoho’s audience to create consistent cash flow. He has written articles for floatapp– one of the leading cash flow software and has also been featured in the major publications such as Independent. He has been sharing his learning and insights on his youtube channel.

He wrote about his learnings from helping an e-commerce client scaled the business cash flow positive from £500k to £1.6m in four years in “The Three Key Obstacles to Faster Growth: How You Can Overcome Them Using Cloud Accounting.

In his career spanning 18 years as the cash flow specialist, he has helped businesses of all sizes, ranging from £40K to £40M.

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