Cash Flow Problems and Customer Payment

Last Updated November 14, 2024

What do trucking companies, staffing companies, manufacturers, consultants, and all other industries all have in common? In addition to supplying products and services to Fortune 500 companies, they’re all subject to the same common business strain – cash flow problems. And more often than not, cash flow problems and long customer payment terms go hand and hand.

Healthy cash flow is the lifeblood of all businesses. Without adequate reserves of cash, owners stay awake at night thinking about debt coverage, meeting payroll, dwindling inventory levels, covering taxes, etc.

Top 5 Causes of Cash Flow Problems

Cash flow problems is the No. 1 reason small businesses fail.

But this statistic isn’t surprising, nor does it help you overcome your cash flow-related obstacles. It’s helpful to know the root causes of cash flow problems so you can prepare your business for any hurdles that may be thrown your way.

1. Late Customer Payment

Customers extending their payment terms or simply not abiding by agreed-upon terms is quickly becoming the norm. As large multi-national businesses continue to stretch their suppliers, the smaller, regional suppliers of raw goods and services are now experiencing the ripple effect. Whether it’s a delinquent customer or a customer with buying power and long-terms, delayed customer payment can cause an enormous strain on your own cash conversion.

2. Decreasing Sales

Unsurprisingly, one of the biggest triggers for cash flow problems is lower profit margins due to decreased sales.

Fluctuating sales are an inevitably of doing business, but it’s important to brainstorm ways to mitigate this or revert poor sales back to normal if it’s happening with your business. For example, you might need to either increase or decrease your prices or look into offering new products.

3. Lack of Cash Reserves, Often Due to Rapid Growth

Sometimes, business owners find their business growing before they have the necessary resources to keep up with the growth. On the surface, growth can hardly be viewed as a bad thing, but unanticipated or swift sales can potentially put a company out of business. More sales means more inventory, more people, and the need for more money. If your revenue is growing, but your working capital stays the same, that next big customer order you fill could leave you short on cash for your next supplier payment, tax bill, rent check, or loan payment.

4. Outstanding Receivables

When customers are slow to pay or don’t pay on time, it leads to an unhealthy cash conversion cycle. The longer your receivables are outstanding, the longer you’re missing out on potentially valuable working capital that could otherwise be the cash injection you need.

5. Seasonality

Perhaps the most common cash crunch amongst customers, excessive seasonality can wreak havoc on a company’s balance sheet. Large cash needs followed by significant cash inflows followed by a quiet season can make planning difficult if not impossible to predict. Having a flexible financing and working capital solution in place can allow business owners to take advantage of seasonal sales rather than succumb to them.

Related: Seasonal Business Funding

Benefits of Improving Customer Payment

By collecting cash from customers faster and withholding payment to suppliers longer, companies are able to increase their own cash positions and redeploy that money for their own benefit (increase dividends, initiate stock buybacks, invest in their supply chain, hire new employees, etc.). Essentially, powerful buyers are utilizing their suppliers as a free form of debt.

The strain that slow payment inflicts on the supplier is undeniable. When once-healthy businesses find themselves with cash flow problems and their unable to pay their own suppliers, take on new orders and pay their employees, they then struggle to keep their own doors open.

When you improve (accelerate) customer payment, you in turn accelerate your cash flow. It allows you to more easily grow or expand your business, pay your employees, and create new and improved products. Plus, putting in the effort to find healthy workarounds for paying invoices with your buyers can by effect enhance your relationship with them if done the right way.

How to Improve Customer Payment

The business owner that finds him or herself on the wrong end of a one-sided buyer/supplier relationship with little hope to negotiate has a few options. Some of which include:

• Fire the problematic customer. This of course assumes dropping the customer will not cripple the business’s growth or long-term viability. This should be a last-resort tactic.
• Grow your own cash reserves. Perhaps the cheapest and most difficult way to solve cash flow problems is to reduce cash outflows. Whether it be cutting costs, delaying payments, or collecting other receivables faster, companies must make difficult decisions in order to conserve cash.
• Ask their supplier if they offer supply chain finance. Many large buyers are offering to finance their supplier’s working capital through prearranged agreements with third-party banks. These rates are typically much lower than what the small business could secure on its own.
• Be transparent with your problematic customer(s). Fellow business owners should understand what you’re going through. Simply being honest and letting them know that their payment habits are inhibiting your cash flow or overall progress can go a long way to mending the relationship.
• Try early payment discounts. Early payment discounts are a common workaround when the supplier needs cash faster than the buyer can provide it. For example, a 2/10 net 30 payment discount means that the buyer receives 2% off of the product or service if they pay within 10 days. This encourages prompt payment.
• Consider invoice factoring. By partnering with a small business lender like altLINE, companies can increase their working capital through a variety of products and services that prevent dangerous cash crunches while continuing to supply their large strategic customers.

Use some of our email templates for collecting overdue invoices if you’re struggling with how to get started.

Using Factoring to Reduce Cash Flow Problems

Invoice factoring is a great tool for improving cash flow for your business. By factoring your invoices, you’re effectively selling your accounts receivable to a third party (a factoring company) in exchange for cash up front. This type of financing offers faster, easier approval, and is also a scalable solution that can grow with your business. Unlike traditional loans, factoring is not considered debt and thus does not impact your credit.