Cash Flow Problems and Customer Payment

Last Updated December 28, 2023

What do agencies, staffing companies, manufacturers, consultants and other industries all have in common? In addition to supplying products and services to Fortune 500 companies, they’re all subject to the same strain caused by one of the latest trends in corporate finance – longer payment terms. More often than not, cash flow problems and extended 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.

5 Causes of Cash Flow Problems

1. Rapid 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.

2. Expanded Product Offerings

In addition to revenue growth, new projects and new products can require a substantial investment. Delays in launch, unsuccessful initial sales, and development related expenditures can devour a company’s cash balance. Diversifying your offering is a viable and often game-changing strategy, not having a cash safety net in place prior to doing so can be deadly.

3. 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

4. Delayed Customer Payment

Customers extending their payment 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 (read more about Longer Payment Trends here). 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.

5. Unexpected Events

Abnormally large tax bills, law suits, customer bankruptcy, inventory obsolescence… there’s really no shortage of things that can simply go wrong. No matter how much preparation or cash reserves you have in place, there is always the potential for your cash position to be consumed by an unexpected event and for your business to go from healthy to distress.

Benefits of Improving Customer Payment

By collecting cash from customers faster and withholding payment to suppliers longer, large 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. For example, Proctor & Gamble has moved from 45 day terms to 75 day terms, GlaxoSmithKline is shifting from 60 to 90 day terms, and Mondelez International is extending terms all the way to 120 days.

The strain this inflicts on the supplier is undeniable. Once healthy businesses find themselves with cash flow problems and the inability to pay their own suppliers, take on new orders, pay their employees, and in many cases – keep their doors open.

What Can You Do 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:

• Firing the customer. This of course assumes dropping the customer will not cripple the business’s growth or long-term viability.

• Growing their 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.

• Asking their supplier if they offer supply chain finance. Many large buyers are offering to finance their supplier’s working capital through prearranged agreements with 3^rd party banks. These rates are typically much lower than what the small business could secure on its own.

• Consulting a bank. By partnering with a small business lender like The Southern Bank, 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.