Why Businesses Struggle with Maintaining a Steady Cash Flow & How to Fix It

Maintaining a steady cash flow is one of the most critical factors for the survival and growth of a business. Cash flow is the lifeblood of any company, enabling it to meet day-to-day expenses, invest in growth opportunities, and cushion against unforeseen financial challenges. However, a common and often underestimated challenge that disrupts this cash flow is the delay in receiving payments from customers. This issue can have significant ramifications, especially for small to medium-sized enterprises.

For many businesses, a steady cash flow is crucial for meeting obligations such as payroll, rent, utilities, and inventory purchases. However, when customers delay their payments, this delicate balance is disrupted. Invoices that remain unpaid for extended periods can create a domino effect, leading to financial challenges.

Delayed payments can cause significant strain on a business's finances. When customers don’t pay on time, the company may struggle to cover its expenses. This can result in several adverse outcomes:

1. Increased Borrowing: To compensate for the shortfall caused by late payments, businesses may need to borrow money, either through bank loans, lines of credit, or credit cards. While borrowing can provide a temporary solution, it also comes with interest costs, which can further strain the business's finances.
   

2. Damaged Relationships: Late payments can also lead to strained relationships with suppliers and vendors. If a business cannot pay its bills on time due to delayed customer payments, suppliers may impose penalties, reduce credit terms, or even cease doing business with the company altogether.
   

3. Missed Opportunities: A lack of cash flow can prevent businesses from taking advantage of growth opportunities. Whether it's investing in new technology, expanding into new markets, or hiring additional staff, the inability to access funds can limit a company's potential.
   

4. Operational Disruptions: In extreme cases, delayed payments can lead to operational disruptions. If a business cannot afford to purchase inventory, pay employees, or maintain equipment, it may struggle to deliver its products or services on time, potentially losing customers and damaging its reputation.

Understanding why customers might delay payments can help businesses develop strategies to mitigate the impact of late payments on cash flow. Here are a few potential reasons:

• Complex Payment Processes: Some companies have complicated or slow payment processes, requiring multiple levels of approval before a payment is made. This can significantly delay the time it takes for an invoice to be settled. Adding automation and mandate compliance checking ensures the invoice doesn’t need to be corrected and resubmitted, adding further time delays.

• Disputes or Errors: Invoices that contain errors or are disputed by the customer can take longer to be paid. If the customer believes they have been overcharged or that the product or service delivered was not as agreed, they may withhold payment until the issue is resolved.

• Cash Flow Issues on the Customer’s End: Just as businesses struggle with cash flow, so do customers. If a customer is experiencing financial difficulties, they may delay payments as they prioritize their expenses. Using a digital platform to track customer payment trends can easily highlight where customers are beginning to slip on their ‘normal’ days to pay.

• Deliberate Delays: Unfortunately, some customers intentionally delay payments to improve their cash flow. By extending the time they take to pay suppliers, they can retain more cash within their business for longer.

While delayed payments are a common issue (over 50% of invoices in North America in 2023 alone), businesses can take steps to mitigate their impact. Implementing clear payment terms, offering incentives for early payments, and maintaining regular communication with customers can help reduce the likelihood of late payments.

Adopting automated invoicing systems, like those offered by BlackLine, has the greatest impact on cash flow. These tools accelerate the billing process, minimize errors, and help ensure compliance with industry mandates, streamlining operations and boosting accuracy. 

Beyond invoicing, implementing automated credit controls, risk monitoring, and customer communication systems allow you to easily manage your entire customer base.

Maintaining consistent contact and applying standardized procedures ensures timely payments, reduces unforeseen issues, and fosters a more reliable cash flow through targeted, consistent communication.