Navigating Cash Flow Challenges: Key Issues and Best Practices
Cash flow is the lifeblood of any business, yet it’s one I have a conversation about nearly every single week.
Your cash flow determines whether you can pay your bills, invest in growth, and weather unexpected challenges. And the latter one is usually when you discover you have a cash flow problem!
If you’re always feeling like you’re robbing Peter to pay Paul then this is for you. Especially if you feel like this even when sales are good.
I can hand on heart say that a cash flow problem is the final nail in the coffin for so many businesses - so as we go into 2026/2027 don’t let it be for yours.
So what are the main issues when it comes to cash flow?
Overspending on Stock
Have you got surplus goods that surpass demand? Hello overstocks! This situation often arises due to inaccurate demand forecasting or overbuying. Any sudden unexpected changes in the market can also cause this issue - for example, after businesses purchased a tonne of stock during covid only to see sales grind to a comparative near halt afterwards.
Holding too much stock can give you increased storage costs and decrease operational efficiency. Not to mention if the excess stock can degrade over time!
But one of the main things about overbuying is that buying too much stock ties up cash that could be used elsewhere in your business literally tying your hands together. Don’t fall into the trap of feeling reassured by having lots of stock on hand - if your stock isn’t turning fast enough there’s a problem.
An easy way to predict how soon you think you’ll be rid of it is to divide the stock quantity by the amount you sell each week - this is your weeks cover and it could be mind blowing. In an ideal world you want your stock turning every 6 months max. Which leads me on to my second point.
2. Slow Stock Turnover
Slow moving stock not only impacts cash flow but also takes up valuable storage space. Whether you’re in fulfilment, have your own office/unit or you’re working from your spare room, it will become an issue.
And the thing about slow turning stock is that it limits what else you can buy in, what else you can develop, it kind of backs you into a corner.
However, a business with a high stock turnover is likely to react better making it generally more profitable than one with a low inventory turnover.
If you’re reading this and you’re sat on stock, and particularly if it’s old then GET RID! ASAP!
3.Frequent and Excessive Markdowns
When people talk about cash flow issues they don’t labour this point enough in my opinion. Your business not only needs a healthy top line (i.e revenue coming in), it also needs a healthy bottom line (profit).
Heavy discounts might move your stock, but it eats into your margins and profitability! And if you’re doing this regularly and it’s unplanned then you will wind yourself into a cash flow problem very fast.
Don’t fall into the trap of thinking ‘the stock is selling, great’. It might well be but your bottom line will be dwindling.
Now I’m very focussed on profit and I’m also big on discounts that recruit and reward profitably - so this isn’t to say don’t discount, the maths just has to stack up.
4.High Business Costs
Another absolute killer that many fail to look at. Your fixed expenses such as rent, utilities, and subscriptions can balloon if not carefully managed. And when your overheads are too high, it becomes much harder to maintain healthy cash flow.
The thing about business costs is that when your revenue dips, they stay the same! And this is the quickest way to say goodbye to your profit and hello to your cash flow issue.
To make this even harder, if you find yourself in that position month after month it’s even more difficult to dig your way out, especially without any reserves of cash.
Make sure you streamline your business costs - you should run as lean as you can until there’s no longer the need to run things that way. Regularly check in on them and make sure your break even amount each month is etched in your mind. That way you know how close to the wire you’re operating by the day.
But once you’ve brought them down they are what they are and the challenge then shifts to bringing in as much top line revenue as possible to allow you to burn through your business costs and out the other side in profit territory.
5.Taking Too Much Money Out of the Business
I would say this is probably the most common reason for a cash flow issue and it mainly stems from a lack of understanding of what you can and can’t take. A lack of knowledge about what you should be putting aside for tax, how much you need to leave to one side for stock and a general disregard for anything P&L (profit and loss) related.
Drawing large amounts for personal use can cripple your business’s ability to reinvest and cover the essential costs. Once it’s gone it’s gone!
Now I get it you need to earn money - but only if you’re making it to take. If you’re not then it’s not yours to take. Understanding this is key.
To put it into perspective - if you’re turning over £50k one month you may make anywhere between £5k and £10k profit, most likely around £7/8k. And then this £7k isn’t for spending, it’s not for you to pay yourself. Your business needs cash leaving in it. What about the months you do £15k and make £2k in profit?
The point being, all the money isn’t for spending. And…if you use your personal bank account for business STOP immediately! I actually think it shouldn’t be allowed but here we are.
6.Hitting the VAT Threshold
Cry cry, this is a tough one for so many businesses and one I always advise on as they grow. It’s very rarely considered and can come as a HUGE shocker!
Crossing the VAT threshold without preparation can surprise businesses that are unprepared for this leap. When your turnover hits more than £90,000, you’re legally required to register for VAT (you should really do on the run up to hitting the threshold).
But for some businesses, this can actually leave them worse off. For example by going just £5,000 over the threshold, a business would end up paying £11,000 in tax, leaving them worse off than the previous year.
So, what’s the answer? Go through that threshold like a bullet train! Once you see it coming you can prepare for it and that’s the key - having your eyes wide open to all these things in your business.
7.Failing to Set Aside Money for Taxes and VAT
Kind of mentioned this earlier but giving it its own space because it’s a big one.
You’re in the position of having to pay VAT and obviously you’re paying tax. But…you’re not putting money aside for it. Or, you’re dipping into it for other stuff. Or even worse, to pay yourself.
Not reserving funds for tax can create a cash flow crunch when payments are due and it never ends well. Not just this, but having spare cash for other issues also needs to be a consideration.
How to get around this is, yes…you guessed it, just put the money aside in the first place and leave it alone! But you can only do this when you know what you need to put aside. Speak to your accountant and figure out a % of your revenue that needs putting away each month and then stick to it.
How do you avoid Cash Flow Problems then?
1.Create a Realistic Cash Flow Forecast or P&L
If you don’t already I would highly recommend you start keeping a profit and loss sheet. I don’t care if you take £2k a month - detailing it in this week allows you to focus on the things that matter and starts you off on a great foot.
Honestly, I work with clients who have been in business for over 5 years and still haven’t got this together. Even if you think you have your eye on it, make sure it’s detailed somewhere you can update and follow every single month.
If you’re reading this thinking but I’m rubbish with numbers and with a reluctance to learn or look at them, then you might just be in the wrong business.
2.Manage Your Stock Wisely
Firstly, purchase strategically: Only buy stock you’re confident will sell, and avoid over ordering to take advantage of discounts. If you can’t sell it then you’re back to square one.
I realise you don’t know exactly what will sell but you can absolutely take a best guess. Look at past sales and use your data to inform your decisions.
And if it’s been sat there for too long then slash it and move on. Yes you’ll make a much lower margin but if it’s a case of ‘lesson learnt’ then get it done.
3.Rethink Your Discount Strategy
Avoid overusing unplanned markdowns: Instead of frequent discounts, focus on value driven promotions like bundling products or offering added perks.
Set clear discount goals: Ensure that markdowns are part of a planned strategy to move stock or attract new customers without slashing into margins too heavily.
You will live to regret it I promise you.
4.Control Business Costs
Review expenses regularly: Look for areas to cut unnecessary spending, such as unused subscriptions or inefficient processes.
Negotiate with suppliers: Seek out better deals on stock, utilities, or services to reduce costs.
5.Keep Personal Drawings in Check
Pay yourself a fair salary: Avoid large, ad hoc withdrawals from the business account. Separate personal and business finances: This ensures that you don’t accidentally use business funds for personal expenses.
6.Prepare for VAT and Taxes
Understand VAT thresholds: Keep track of your turnover and prepare for the point when you need to register.
Set aside tax funds: Open a separate savings account specifically for tax obligations, and deposit a portion of your revenue into it regularly. You will need to know your rates, incorporate VAT into pricing, keep a separate VAT account - and make sure you keep an organised record.
I always recommend an account like Starling, which is what I use myself. It allows you to put your money into ‘pots’ so you don’t dip into it.
7.Monitor and Adjust Pricing
Regularly review your pricing strategy to ensure it reflects your product value and covers costs.
Remember: Healthy cash flow isn’t just about making more money - it’s about managing the money you already have effectively.