|This piece has been written in collaboration with Esther Friedberg Karp, an esteemed bookkeeper and QuickBooks ProAdvisor.|
Cash flow is an integral financial metric for businesses, and it can often be a challenging one to manage. Cash flow is one of the indicators used to understand the financial health of a company, and if left unmonitored, it can pose serious risks to the long-term future of the business.
Many profitable businesses have fallen victim to cash flow problems across different stages of growth, leading to financial distress and hampered growth. ¹
For international businesses especially, keeping an eye on cash flow is essential to ensure that your business can operate as needed across different markets. For this article, the focus will be on common cash flow problems and solutions that international businesses may face.
|Take control of your cash flow - see all your currencies in one place and move your money easily with Wise Business account|
The simplest way to define cash flow is that it essentially refers to the money that is coming in and out of your business. ²
There are three main types of cash flow for businesses with differing frequencies in the business’ life:
- Operating: Daily expenses incurred for running the business
- Investing: Occasional and less frequent expenses required to grow the business
- Financing: Does not occur very often, refers to cash gained from issuing debt, equity, or paying dividends, etc.
Cash flow problems occur when the business cannot cover cash outflow due to a lack of cash inflow.
While in some cases, higher cash outflow can be a temporary issue as the business invests in itself to lead to further profit later, it can cause issues if cash inflow is not high enough to balance it out.
However, in other situations, cash inflow will increase in the short-term if a business receives a loan and will decrease as the business pays it back. If there is not enough cash inflow during the repayment period to cover payments and other business outlays, that is a problem.
Cash flow problems tend to be a common issue for international businesses for various reasons. Both service-based businesses and those with physical inventory can face cash flow issues.
One of the key reasons some businesses might be more susceptible to cash flow issues stems from how cash is collected versus how it’s spent. If there is a huge gap between cash being collected from customers and when suppliers are paid, it could signal issues with cash flow that businesses must rectify.
This article will look at some of the common cash flow problems that international businesses can encounter. The goal is not only to solve current cash flow problems, but also to develop strategies to help avoid them in the future.
Slow cash inflow versus rapid cash outflow is an issue that can creep up very suddenly and have pretty dire consequences.
If you’re paying suppliers within 30 days but receiving cash from customers within 60 days, there is going to be a big gap. You’ll have to cover operating costs until customer payments come, but it barely gives you any breathing room to balance cash flow.
Or, if customers seem to be slow in paying invoices while suppliers are demanding their payments, it might be time to reassess your current payment system and how to incentivize customers to pay faster.
There are a few ways to solve this issue. Firstly, be careful with giving credit; also, make your terms explicit and clear to discourage late payments. It’s important to remove any payment barriers for customers to encourage them to pay invoices faster, for example by letting them pay in their own currency.
Doing so can be beneficial for both business owners and their customers. It provides customers with added convenience, while ensuring that business owners can avoid volatile exchange rates and markets and still receive the total amount owed. Make sure this is all included in the payment terms and contracting before you kick off any work.
Solutions such as invoice factoring can also help in the short term, where you ‘sell’ portions (or all) outstanding invoices to a third-party company. They’ll pay you for most of the invoiced amount and collect payments from customers directly.
You can also apply for a business loan to stabilize cash flow, but do so only after considering the business’ liquidity and ability to pay it back.
Expansion and new market entry is an exciting time, but it can strain cash flow - especially when underestimated. For some businesses, startup costs can end up being more than expected, or they weren’t appropriately budgeted for before expansion.
In addition, many initial costs can mess with the budget, including buying any land, renting a place, performing leasehold improvements and purchasing necessary equipment, filling the space with inventory, and paying out operating expenses - all of this must occur before the business is able to generate income in the region.
For international businesses, there are added challenges of opening new entities in various regions and navigating through office space and overhead costs while adjusting to local market rates and outsourcing work as needed. Setting up another physical branch of your business in the UK or Canada might look like the obvious next best move, but the costs of doing so vary wildly between London versus Birmingham or Toronto versus Montreal.
“There are also logistical complexities to opening new locations in other countries.
Oftentimes, in order to open a bank account in a new jurisdiction, the business must jump through various government hoops, including registering the business and having a resident of that jurisdiction on the board of directors. This might also involve registering to collect sales tax and/or to pay employees and withhold deductions.
Costs and currencies aside, companies must perform their due diligence regarding understanding the market, licensing, as well as legal, tax, and accounting considerations in the new jurisdiction. It’s important to consult a lawyer and/or accountant with expertise in the new area.”
Foresight is very important before businesses can undertake global expansion. When considering new markets, it’s important to pause at the ideation stage and plan.
Think about your portfolio, marketing strategy, competitors, current funds, inventory, and a rough budget for everyday operating factors. You’ll also need to add employee costs to this calculation, as well as key performance metrics, forecasts, income projections, and more.
If you’ve found more reasonably priced suppliers, manufacturers or contractors overseas, your product or service might initially appear to be pretty profitable. But quite often, most small business owners overlook:
- the potential hefty added costs associated with those payments - leaving your margins a little less healthy
- the time it takes for international transfers to process and clear, meaning you might not be able to access your money immediately, even when you need it urgently. (i.e. unable to access it when you need it most)
...all of which can leave your cash flow a bit precarious.
Having a foreign currency business account like Wise gives you more control over your money. You can receive, hold and send in several currencies from one account, which can help minimise exposure to exchange rate hikes and losing money on conversion fees.
Paying bills from overseas suppliers or contractors like a local means you don’t waste valuable time on admin, like figuring out how to convert the rate.
On the flip side, if your business serves international customers, multi-currency accounts give you the flexibility of getting paid in local currencies that work for them, removing barriers to getting your invoice paid on time. Plus, it also means you’ll be able to access that money much easier and quicker than using traditional banks.
|Expert Insight from Esther Friedberg Karp|
“If you are set up to do business in whatever currency your customers and vendors prefer or mandate, and if paying you or getting paid by you is easy, trouble-free, low cost, and fast, these customers and vendors will more likely stand by you over time.
“There are plenty of long-standing, traditional barriers to doing business with another party internationally, whether it’s because of a difference in time zone, language, taxes, licenses, or shipping delays and costs. Don’t let currency add to those woes.”
“According to a Dun & Bradstreet report, “Businesses with fewer than 20 employees have only a 37% chance of surviving four years and only a 9% chance of surviving ten years. It is particularly striking that the failure rate for new businesses seems to be around 70% to 80% in the first year and that only half of those who survive the first year remain in business the next five years.” ¹
The failure of a business can often be attributed to a lack of cash reserves and cash flow mismanagement. A cash reserve is an integral part of ensuring your business’ life, especially in the beginning when cash flow tends to be the slowest. Having a cash reserve can help cover startup costs and plug any cash flow gaps as needed to prevent heavy losses.
When starting a business, it’s crucial to do it right by having the needed reserves from the beginning. That’s where forecasting can be incredibly helpful to help you see what your business will require before you start earning.
You might also want to reconsider operating cash flow to keep costs down while you build up reserves. Additionally, you should also reconsider payment dates to vendors and from your customers to minimize gaps and keep cash flow balanced.
Cash flow management is an essential part of a business and often where early trouble arises. It’s a valuable part of financial health and provides oversight into whether the business can continue running as usual - especially for international businesses. If cash flow is not effectively managed, particularly operating cash flow - such as everyday expenditures-, it becomes more difficult for businesses to continue running as normal.
A key way to ensure that cash flow is being managed is to do a cash flow analysis at regular intervals to monitor the business and its financial health.
Doing so can help spot problems early on so that companies can take proactive measures to solve issues. In addition, preparing a cash flow statement as part of regular financial reporting provides better oversight into the business’ cash position.
External effects can essentially mean checking what competitors are up to and any market issues that could arise. This could also extend to larger global events, with COVID being the prime example in the years 2020 and 2021, financial crises, political events, and other major issues.
This is one of the toughest ones since no one can predict the future and prepare for absolutely every scenario. However, having a cash reserve can help pull you through during an unforeseen circumstance. Furthermore, the more you follow the business world, market, and competitors, the better chance you’ll have at predicting external effects and staying ahead.
Investing in your business is absolutely crucial. However, if you are not mindful when managing the business’ capital/free cash flow, it could lead to trouble. Not investing enough will hamper your growth as a business, and it’ll get increasingly difficult to stay in the market without suffering as a business. Plus, customers and sales go down as a result, leading to financial distress.
Although working on your products and services is essential for future growth, the most important thing to bear in mind is the timing. Putting money into developing a new product line or service, or launching in a new country, all requires cash up front and won’t have immediate returns or could be slower than you had predicted.
Make sure that you’ve got a proper business plan in place to review the areas of your company that will likely yield the most return and invest back in at a time you can afford to do so without crippling your position.
Loans can be incredibly beneficial for a business, but they can also end up costing your business a lot if done incorrectly. There are problems that come into play: high interest rates and/or the inability to pay the loan back. As debt rises, cash flow is impacted, leading to serious operational issues.
Before taking out a loan, it’s crucial to explore all options. When choosing the best loan for a business, consider your cash flow when using reports such as a cash flow statement and balance sheet.
Whenever possible, use free cash flow to repay the loan and bring your balance (and interest costs) down. Additionally, you can identify new revenue streams to help pay the loan back or look at current costs and expenses to reallocate some of the money to loan payments.
Every business is unique, and growth comes at different times. It’s difficult to continue growth without jeopardizing the business while still capitalizing during this period. However, rushing the process tends to do more harm than good. As you bring on more employees and inventory, operating costs will increase. As a result, the business’ performance may not go as planned, or you may run out of cash earlier than expected, leading to issues.
Pacing your expansion strategy in the right way at the right time is key. If you’ve got ambitious plans to launch in several new markets over the next 12 months, carefully consider doing so in a more gradual way. Map where you’ll grow first and how that’s going to happen, for example researching all the:
- inventory/property prices
- as well as market performance.
If your business is product-based, growing at a more steady pace will help you better manage your inventory and the sudden increased demand for your products without having to spend all your cash to cover every single potential market up front.
To compensate for rapid growth, make sure you’ve planned ahead and given yourself enough time to build a “safety net” cash reserve in case of an emergency or unexpected event.
There are definitely many scenarios that can come into play when it comes to cash flow problems. The likelihood is that they tend to be connected, making it difficult to rectify the issue.
Rapid growth can lead to less investment in the business and cash flow management difficulties. Or expansion and new growth may not match the targets you had in mind, leading to cash flow issues. However, understanding some common cash flow problems and solutions can help you spot them faster, giving you time to devise a solution before it becomes a larger issue.
Wise offers a variety of easy and convenient solutions to help you manage your business’ finance. Find all your currencies in one place, with one account for more than 50 currencies, so you can connect with customers and suppliers overseas.
Easily move money between your currencies when you need to and make payments with one click. Pay employees, invoices, and manage subscriptions around the world, all from one account and save up to 19x compared to PayPal on international transfers.
With Wise you can also get paid faster.
Wise for Business offers local account details in up to 10 currencies -IBAN, Routing Number, Sort Code and more-, making invoicing easy for your international customers.
- STICE, Derrald; STICE, Earl K.; STICE, James D. Cash flow problems can kill profitable companies, 2017. International Journal of Business Administration (2017) 8 (6): 46-54.
- Harvard Business School - Cash flow vs. Profit
Sources checked 15 September 2021
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
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