Cash Flow Problems: The Best Solutions to Address and Anticipate Financial Risks

1 – Top Causes of Cash Flow Challenges for Businesses

Money matters can be a real headache for business leaders. They find themselves constantly chasing payments from customers, while operational debts keep piling up. Balancing the books and keeping suppliers content turns into a Herculean task, all within a vicious cycle that can have serious financial repercussions.

1.1 – Imbalance on the Balance Sheet: A Low or Negative Working Capital

Sometimes, cash flow woes run deep within a company’s financial structure. This occurs when the firm’s accounts are negative or insufficient working capital. In essence, stable resources like equity and long-term financial debts fail to adequately finance long-lasting assets. It’s a situation where the company over-invested through self-financing, leaving insufficient funds for day-to-day operations.

1.2 – Managing High Working Capital Requirements (WCR)

Working capital is the lifeblood that keeps daily operations afloat. It acts as a buffer between stable resources and long-term investments. Businesses need it to stock up, make sales, and await payments while still meeting supplier demands. This constant need for liquidity can become problematic when the working capital requirement exceeds the available resources, forcing the company to secure external financing or find internal methods to reduce working capital or increase available funds.

a. Inadequate Inventory Management

Cash flow hiccups can come from having too much stock on hand. Think of it as money just sitting there. While you don’t want too little stock (that slows down sales), having a ton can pinch your cash. And if you have to slash prices to move that stock? That can hit your profits hard. Moreover, stock can also jeopardise your profitability, especially if you have to discount items or materials to improve turnover.

This is particularly true for product marketplaces, it can be easily applied to service marketplaces as well. This is the case, for example, with platforms that connect service providers (freelancers, small and medium-sized enterprises) with clients (businesses) in search of a specific skill or service. The challenge then shifts from managing stocks to managing resources in a broader sense, whether we are talking about talents (e.g., freelancing marketplace) or suppliers (e.g., equipment marketplace).

b. Customer Receivables With Excessively Long Payment Terms in the Face of Suppliers’ Need for Rapid Payment

Do you sometimes stretch between managing customer collections and supplier payments? Working with contractors or freelancers, for instance, as an intermediary platform? Then you’re familiar with this dilemma. If, moreover, customer account monitoring is lacking and payment delays or defaults accumulate, liquidity deteriorates.

1.3 – Unreliable Cash Flow Predictions

Predicting and anticipating cash flow is essential for financial stability. Creating a treasury budget is a best practice, but failing to update it based on the bank’s situation, order backlog, and receivables and debt deadlines can lead to financial troubles.

1.4 – Unmanaged Cash Runway During Business Expansion

After the business establishment phase comes growth. Wanting to increase turnover? Your WCR will inevitably rise. If you don’t implement appropriate measures, you’ll face financial difficulties.

a. Cash Runway: Definition

The cash runway is your financial survival gauge. It tells you how many months your company can stay afloat with the cash it has on hand, based on average monthly revenues and expenses.

b. Pitfalls of Not Tracking Business Cash Runway

Business leaders not monitoring this indicator miss an essential foresight tool. Without managing the cash runway, if the company makes numerous uncounted marketing expenses, it risks payment cessation, potentially becoming embroiled in legal proceedings before even seeing the effect on sales growth.

Business leaders not monitoring this indicator miss an essential foresight tool. Without managing the cash runway, if the company makes numerous uncounted marketing expenses, it risks payment cessation, potentially becoming embroiled in legal proceedings before even seeing the effect on sales growth.

2 – How to Mitigate Cash Flow Concerns Internally?

When you identify these cash flow hurdles, it’s time to roll up your sleeves and address them head-on. And if that’s not enough, it might be time to explore external funding options.

2.1 – Importance of Forecasting in Cash Flow Management

Start by giving yourself visibility within the company. Incorporate a cash forecast as a standard part of your management practices. Anticipation should be part woven into the fabric of everyday operations. Monitor indicators like the cash runway, customer acquisition cost (CAC), LifeTime Value, and churn rate. With this perspective over several weeks, you’ll have the time and space to calmly strategise solutions for any potential cash flow challenges.

2.2 – Strengthening and Rebalancing Business Financials

Boosting working capital internally can involve injecting fresh funds from partners. Options such as capital increases, contributions in current accounts, or deferring dividend payments can help resolve your financial problems.

2.3 – Best Practices for Working Capital Requirement (WCR) Management

When it comes to working capital needs, particular attention should be given to revolving asset items.

a. Inventory Management for Optimal Cash Flow

Keeping inventory in perfect balance means having just the right amount: enough to ensure smooth operations, but not so much that it becomes excessive. It’s a delicate part of the supply chain game. Effective management control allows you to track vital indicators like inventory turnover and customer service rates.

b. Streamlining Customer Invoice Processes

Another effective approach to tackle cash flow challenges is to optimise your handling of customer invoices. There may be opportunities to expedite payments. Here’s what you should check out:

• Are your payment terms competitive within your industry?
• How quickly are you dispatching invoices?
• Can you encourage upfront payments, offer early-bird discounts, or request advances?
• What’s your strategy for timely payment reminders to customers?

c. Don’t Pay Suppliers Late, Even to Reduce WCR

Are you tempted to pay supplier invoices after the due date to reduce your working capital needs? Bad idea! While it’s possible to negotiate longer payment terms within the limits of the law, making payments for goods or services after the specified date is entirely counterproductive. By doing so, you create a cash flow problem for your suppliers, which is not the best way to foster their loyalty.

When it comes to working capital needs, particular attention should be given to revolving asset items.

a. Inventory Management for Optimal Cash Flow

Keeping inventory in perfect balance means having just the right amount: enough to ensure smooth operations, but not so much that it becomes excessive. It’s a delicate part of the supply chain game. Effective management control allows you to track vital indicators like inventory turnover and customer service rates.

b. Streamlining Customer Invoice Processes

Another effective approach to tackle cash flow challenges is to optimise your handling of customer invoices. There may be opportunities to expedite payments. Here’s what you should check out:

• Are your payment terms competitive within your industry?
• How quickly are you dispatching invoices?
• Can you encourage upfront payments, offer early-bird discounts, or request advances?
• What’s your strategy for timely payment reminders to customers?

c. Don’t Pay Suppliers Late, Even to Reduce WCR

Are you tempted to pay supplier invoices after the due date to reduce your working capital needs? Bad idea! While it’s possible to negotiate longer payment terms within the limits of the law, making payments for goods or services after the specified date is entirely counterproductive. By doing so, you create a cash flow problem for your suppliers, which is not the best way to foster their loyalty.

3 – How Do You Deal With Cash Flow Problems Using External Financing?

When these internal levers aren’t enough to restore cash flow, companies turn to external solutions.

3.1 – Improve Your Working Capital (WC) With Short-Term Commercial Bank Loans

If you’ve made too many long-term investments using your own capital without borrowing, consider seeking financing from your bank. With this credit, you can improve your working capital and alleviate cash flow constraints.

3.2 – Conventional Solutions That Don’t Truly Support Business From Within

Traditional measures to address cash flow difficulties often involve opting for short-term working capital financing. Businesses typically turn to their banks or factoring companies.

a. Short-Term Bank Loans

These solutions for obtaining fresh capital require entrepreneurs to plan ahead and prepare a comprehensive application. Accounting documents, financial projections, and collateral to cover risks: even for seasonal businesses, securing a working capital loan from a bank can be challenging.

b. Conventional Factoring

This type of contract between a factor and a business involves selling existing and future customer invoices to obtain an immediate but partial cash advance. Implementing such a contract can be complex, both legally and operationally. It’s inflexible and not suitable for occasional cash flow needs, making this massive customer accounts financing method less than ideal.

3.3 – Embedded Invoice Financing: A Forward-Thinking Solution to Avoid Cash Flow Problems

Other solutions now exist for digital businesses like B2B marketplaces, tech or vertical SaaS companies. Beyond resolving potential cash flow issues, companies that embrace these solutions accelerate their growth and enhance user satisfaction. This is the essence of embedded invoice financing.

a. Definition of Embedded Invoice Financing

The principle of embedded invoice financing is to offer users of a platform (marketplace, SaaS) instant payment of their invoices. This provides them with a new feature on their platform to quickly receive payment for their services.

b. Aria: Your Embedded Finance Partner, Empowering Your Business

Among FinTech specialists providing this kind of service, Aria delivers a straightforward solution to your cash flow challenges. Seamlessly integrating via API into your product, our native system facilitates swift supplier payments through an instant cash advance. Reimbursement takes place when clients settle invoices for completed services. Financing costs are proportional to your requirements.

Use Case for Tech Companies and B2B Marketplaces: Prevent Off-Platform Transactions With Instant Payments on Your Tool

• You are: an tech company or a B2B marketplace looking to centralise transactions on your platform by offering an all-in-one experience.
• Use case: Do you manage a tech company? Some suppliers don’t always use your portal for invoicing. Have a B2B marketplace? Some transactions may occur off-platform to avoid commissions. That’s where Aria comes in. Integrate Aria’s deferred payment option. Enhance your platform’s value proposition. Simplify the user experience. Encourage more transactions on your platform. By integrating an instant financing solution into your product, your sellers/suppliers can get paid quickly. No need to wait for the client’s 60-day payment!
• Benefits:
  • Foster a loyal supplier network: Encourage sellers to stay on your platform with instant payment of their invoices.
  • Limit off-platform transactions: Centralise the entire workflow, from finding suppliers to invoicing, to prevent transactions from happening off-platform to avoid commissions.
  • Revenue boost: Improve user adoption of your tool and increase the number of transactions on your platform.
• Integration: Integrate the Aria solution via API. Our financing experts will guide you through the process, adapting the solution to your unique billing and payment flows.

Cash Flow Challenges Shouldn’t Hinder Your Business Growth

There are solutions available to online businesses that promote sales growth. With embedded invoice financing, you have financing that seamlessly integrates into your operations.