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Common cash flow problems to avoid

Cash flow problems can be challenging. Whatever the size of your trade business, this article shows you common causes of cash flow problems and how to solve them.

The list of causes of cash flow problems among tradespeople is pretty long. Whatever the size of your organisation, you still need to manage cash carefully.

At the large and enterprise business level, cash flow problems are usually a question of scale. Cash flow problems can emerge when paying monthly wage bills, or larger tax payments each year demand careful financial planning.

So, cash flow isn’t something a trade business can ignore. Not for long, anyway. The causes of cash flow problems have a habit of biting a business. Usually when you could least afford it.

If you know what to look for with cash flow, then it’s a start. You should then have time to decide the best way of dealing with cash flow problems.

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What is cash flow?

Cash flow measures the movement of money in your business. Money usually moves daily, so cash flow problems could crop up as often as that.

Actual cash (or petty cash) and bank accounts can both create cash flow problems. One feeds the other, so they shouldn’t be looked at in isolation.

Larger businesses with big bills to pay monthly must be mindful of cash movements during the month. Otherwise, cash flow might not be sufficient to pay those bills.

What causes cash flow problems?

When looking at common cash flow problems, divide the task in two.

A trade business needs to tackle problems with both money coming in and problems with money going out.

Things to consider:

  • Rental costs
  • Bank charges
  • VAT
  • Materials
  • Replacing tools
  • Membership of trade bodies
  • Staff expenditure

There are many factors to consider with any trade business. Whatever your area of expertise, you’ll need to be aware of costs such as materials, tools and licenses just as much as the rates you charge your customers.

Cashflow folder get organised

Problems with incoming cash flow

Not enough sales

Probably the best way to boost cash flow is through more business sales. Sales could be too low to cover your business expenses.

Not charging enough for your skills

It might not be the amount of work you’re doing that causes cash flow problems. It could be that you aren’t charging enough for your work.

Working out your profit margin on jobs is a way to reduce cash flow problems. There are lots of ways of boosting trade profits.

Sales don’t always make cash flow positive

There could be a time lag between billing a job and getting paid. A sales invoice only helps your cash flow when the money is in your bank account.

Cash flow problems can occur if you incur business expenses against income due from sales before you’ve been paid.

cash flow management planning

Big contracts can distort cash flow

While large contracts are great for business, they can distort cash flow. Cash flow problems can occur if you have peaks and troughs of money coming in.

You could think about:

  • Asking larger customers to part-pay their bills
  • Spreading the money coming in more evenly in your cash flow.

Larger trade businesses often request part-payments during jobs. Some require a proportion is paid upfront before the jobs starts.

Methods like these help to smooth cash flow.

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Late paying customers

The bane of many tradespeople’s lives. Late-paying customers make business cash flow management even harder. This applies to small and larger trade businesses.

Again, it’s just a question of scale. A single later-paying customer can throw a small business cash flow off track. Multiple late payers can gradually cause a cash flow problem to build up for large and enterprise trade businesses.

It is why it is so important to know your rights as a tradesperson.

Are your payment terms too lenient? Do you give customers too long to settle bills?

Set your terms of payment out clearly at the start of every job. Don’t give customers an excuse to delay paying you.

Make sure to have robust terms in place with any work contract. Even if it is an emergency job, you should still make it clear how and when you need to be paid. Having good terms in place will mean that you have more chance of policing your incoming cash flow.

Customer credit

One way to avoid late-paying customers is to have a credit check carried out on the potential customer. This could also highlight potential bad debts from customers who refuse to pay or can’t pay you.

However, this process is both time consuming and can prove costly. Which is why you need to weigh up the pros/cons of such an action.

Offering a payment schedule could also help your cash flow.

cashflow for tradespeople

Problems with outgoing cash flow

The other side of cash flow problems is keeping tabs on money going out.

Lack of control for payments

A lot of small payments can quickly add up to a cash flow imbalance.

Why not think about setting up a process for approving purchases before they are made? That way, you can manage cash flow more effectively.

Check supplier terms

Like you, suppliers will have payment terms. But they may not best suit your cash flow management.

Suppliers might offer discounts for early payment that could help your cash flow. You might have to pay earlier but it could be less money exiting your cash flow. Make sure to check their terms.

Some suppliers may also be willing to offer larger trade businesses better terms. This is because of the assumption that bigger business will have better cash flow.

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Making poor purchase decisions

This can be a tricky area for tradespeople who need to act quickly to complete work. Cash flow problems will be more apparent when you spend on ‘big ticket’ items.

This could include things like:

  • Expensive equipment
  • Fluctuating material costs
  • Replacing tools

Buying without doing enough research and cost comparisons could hamper cash flow. As the saying goes ‘Buy cheap, buy twice’. You could end up paying more than you need to.

Too much stock

This can be another significant cash flow challenge for tradespeople. Balancing the right level of stock to do your job is never easy.

Stock you’ve bought that’s sitting on shelves, in a yard or warehouse is probably money out of your cash flow. But in business life, under-stocking can be as much of a problem as over-stocking.

Careful cash flow management needs you to keep an eye on lots of other types of financial information. Stock control is one of them.

building supplies

Expanding too quickly

All tradespeople aim to make a profit. Many grow by expanding. But rapid expansion can also cause cash flow problems.

  • Extra capital expenditures
  • Plant and equipment costs
  • Additional expenses to promote your business
  • Extra staff or subcontractor fees

Cash flow problems crop up if outgoings aren’t being matched by money coming in.

Overdraft expenses

Overdrafts and loans are useful ways for businesses to grow. But don’t forget their impact on cash flow.

Charges for overdrafts, especially unarranged ones, can be high.

Banks will be looking to secure their lending against business assets. That way, banks know they can recoup loans if a trade business cash flow deteriorates by forcing the sale of those assets.

cashflow tradesperson planning

Problems caused by poor business administration

Dealing with the causes of cash flow problems needs close and constant attention. That’s where planning and budgeting comes in.

Keeping a tight rein on your cash flow is a key part of the solution.

Lack of accurate records

Dealing with cash flow problems probably needs daily attention. Cash flow software is an essential cash flow management tool for many tradespeople.

Computer software and apps put cash flow management literally at your fingertips. They should flag up immediately when a cash flow problem is about to hit.

Not enough cash flow forecasting

As a tradesperson, it is possible that you’ll be juggling several jobs simultaneously and thinking about future work at the same time. Cash flow should be treated in the same way – juggling your current and future finance needs.

Cash flow forecasts bring together all aspects of money movement in your business. They help you make plans and decisions that deal with cash flow problems.

Seasonal work can put a spanner in your cash flow if you haven’t forecast its impact. Forecasting also supports things like overdraft and loan applications. They are proof of a well-run business.

Unprepared for the unexpected

Even the best cash flow planning can be impacted if the unexpected happens. You could face unexpected bills.

An unexpected surge in demand for your services could also upset cash flow. You might suddenly have to fork out on expenses for a job that you hadn’t expected.

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Nothing in reserve

Dealing with cash flow problems can be helped by keeping something in reserve. Look at it as your ‘rainy day’ money.

Cash held back in reserve can be released when needed to smooth out cash flow problems. Without cash in reserve, a small cash flow problem could rapidly escalate and be harder to resolve.

For every cash flow problem, there’s probably a solution.

There are lots of ways trade businesses can improve cash flow. You can also find tips for successful cash flow management.

Keep your business moving in the right direction

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Keeping cash flowing in

Of course, one of the best ways to keep on top of your cash flow is by winning more business. Checkatrade members receive our help with new enquiries.

There are lots of other benefits of Checkatrade membership too.

They include:

  • Dedicated membership advice team
  • Work guarantee up to £1,000 (T&Cs apply)
  • Exclusive offers and discounts
  • Up to 20% off Public Liability Insurance
  • Reduced cost of workwear and branding
  • Savings on other business essentials such as vans, fuel and materials

Key takeaways

  • Cash flow problems are caused by imbalances between money into and out of a business
  • Late-paying customers and under-charging your services can mean not enough money comes in
  • Over-stocking, making poor purchase decisions and rapid growth can drain your financial resources
  • A lack of forecasting, poor record-keeping and not putting aside rainy-day money can also lead to cash flow problems

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This is information – not financial advice or recommendation. The content and materials featured or linked to on this blog are for your information and education only and are not intended to address your particular personal requirements. The information does not constitute financial advice or recommendation and should not be considered as such. Checkatrade website is not regulated by the Financial Conduct Authority (FCA), its authors are not financial advisors, and it is therefore not authorised to offer financial advice.
Always do your own research and seek independent financial advice when required. Any arrangement made between you and any third party named or linked to from the site is at your sole risk and responsibility. Checkatrade blog and its associated writers assume no liability for your actions.

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