Contents
A cash flow problem arises when payments fall due before receipts come in. The most common causes are late customer payments, poorly controlled working capital, thin margins and growing too fast. You fix it by speeding up collections, cutting outgoings and arranging suitable short-term funding.
Key takeaways
- A profitable company can have a cash flow problem: it is all a question of timing.
- Repeated overdrafts, a rising DSO and late supplier payments are the first warning signs.
- The solutions combine internal action (chasing payments, stock, costs) with short-term financing.
Why does a company run short of cash?
Cash strain can hit very quickly, whatever the economic backdrop. It usually comes from one of six sources:
1. Insufficient revenue
Too little prospecting, prices out of step with the market, a new competitor, an undifferentiated offer or unhappy customers: when sales fall, receipts no longer cover fixed costs.
2. Poorly controlled costs and margins
Heavy fixed costs or thin trading margins leave little room for manoeuvre. Each sale then brings in too little to absorb the unexpected.
3. Late payments and bad debts
Selling does not guarantee getting paid. Every day a customer pays late is a day of cash the company is funding itself, and a bad debt is a dead loss that stops it paying its own suppliers on time.
4. Too much stock
Stock is part of working capital requirement (WCR): purchases you have already paid for but not yet sold. Oversized stock ties up cash.
5. Growing too fast
Growing the business is good news, provided you can fund it: higher sales automatically increase stock and customer receivables before they generate any cash.
6. The unexpected
A machine breaks down, key employees leave, supplies dry up, a major customer is lost: without a cash reserve, a single event can be enough to throw the accounts off balance.
What are the warning signs?
- Overdraft becomes the norm rather than the exception.
- Average customer payment time (DSO) gets longer from one month to the next.
- Supplier payments are pushed back to meet social security or tax deadlines.
- The forecast shows a negative balance within the next three months.
- Decisions are made without visibility of today’s bank position.
Good to know. In France, payment terms between businesses are capped at 60 days from the invoice date, or 45 days end of month if the contract provides for it. Any delay entitles the supplier to penalties and a fixed €40 recovery fee, which must be stated on your invoices.
How do you solve a cash flow problem?
Act on receipts
- Chase early and consistently, before the due date and again from the first day overdue.
- Offer an early-payment discount, more attractive the sooner the customer pays.
- Invoice sooner: on delivery, or in stage payments on long projects.
Act on payments
- Review every expense line and cut unnecessary costs.
- Negotiate supplier terms, within the legal limits.
- Reduce stock and re-examine your fixed assets: selling or leasing can free up cash.
- Ask for a payment plan on tax and social security debts from the authorities concerned.
Arrange short-term financing
| Solution | How it works | Best when… |
|---|---|---|
| Cash facility, authorised overdraft | Bank credit line to absorb one-off timing gaps | The need is short and recurring |
| Cash flow loan | A loan of a few months, repaid from trading | The need is identified and temporary |
| Factoring | Sale of customer invoices to a factor in return for immediate payment | Customer payment times weigh on working capital |
| Assignment of receivables (Dailly) | Invoices financed through the bank | The company has sound receivables |
| Bpifrance loan or guarantee | Public financing, or a guarantee on a bank loan | The bank asks for additional security |
To compare every option, including medium- and long-term ones, read our guide to business financing sources. If a bank turns you down, you can refer the case to the Banque de France credit mediation service free of charge.
Anticipate cash flow strainE-Trésorerie alerts you before your balance goes negative.
Discover the solutionHow do you stop a cash flow problem from happening again?
- Track your bank position every day, across all accounts.
- Keep a cash flow forecast on a rolling 12-month basis.
- Build a reserve equal to one to two months of fixed costs.
- Manage your WCR with a few indicators: DSO, supplier payment time, stock turnover.
- Nurture your banking relationships in quiet times: it is easier to negotiate a credit line before you need one.
Frequently asked questions about cash flow problems
Can a profitable company run short of cash?
Yes. Profit records sales on the invoice date, cash on the date payment is received. With long customer payment terms, high stock or rapid growth, a profitable company can end up with no liquidity.
What short-term financing options are there?
A cash facility, an authorised overdraft, a cash flow loan, factoring, Dailly assignment of receivables or a Bpifrance loan. The choice depends on how long you need the money and on the quality of your customer receivables.
How can you anticipate a cash squeeze?
With a cash flow forecast updated every month, daily tracking of balances and alerts on critical thresholds.
- Banque de France — statistics and publications on corporate financing and payment times (in French)
- Bpifrance — public financing for businesses (in French)
- economie.gouv.fr — practical guides from the French Ministry of the Economy for businesses (in French)
Director of Sales at E-Finances, a French financial software publisher for more than 25 years.
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