How Many Businesses Fail Due to Cash Flow Problems?

Doing business in the current economic climate can be challenging to say the least. Many business owners feel daunted by the increasing costs of running a business, as well as by the number of companies closing their doors. According to ‘It’s not just start-ups and small businesses that are failing…but 50% of Fortune 500 companies that existed 20 years ago, have disappeared’. Considering those statistics, you may be wondering about the causes of business failure and how many businesses fail due to cash flow problems?

Can a Profitable Business Fail Because of Cash Flow Problems?

Poor cash flow has been cited as being one of the biggest causes of businesses failing. Just how many businesses fail due to cash flow problems? A recent article in states bank studies have shown as many as 82% of businesses close due to cash flow issues. With statistics that high, it pays to consider the state of your own business and to question, can a profitable business fail because of cash flow problems?

While it may seem counter-intuitive, the answer is yes.

Cash flow is not the same as revenue. Even if a business has a great market share and is turning a profit, it can still fail due to negative cash flow. If a successful business has too much of their working capital tied up in inventory or if they scale too quickly, they may find themselves with negative cash flow and unable to meet their commitments or continue operations.

The business may be successful, but if a marketing strategy has a product or service priced too low for too long, it could also negatively affect cash flow. Likewise, if their invoicing isn’t optimised for the cash conversion period, the company may find they have money going out faster than it is coming in.

These are all factors that can be addressed and improved. However, without timely support from insolvency experts, these factors could contribute to a successful company facing insolvency and potentially closing its doors. While global statistics for company closures remain high, Irwin Insolvency has a strong history of helping companies recover from negative cash flow and strengthen their business future.

Which Companies have Failed Due to Poor Cash Flow?

While any business can be affected by poor cash flow, some of the industries most impacted in recent years have been hospitality, manufacturing, and construction. Unfortunately, in these sectors there are a multitude of companies that failed due to poor cash flow.

In the hospitality industry, the impact of the pandemic was felt perhaps the strongest. Failing to recover sufficiently from lockdowns, coupled with debt and rising electricity costs has caused many businesses to close, with fears there could be more closures ahead.

Supply chain issues have had an enormous impact on production costs in manufacturing and construction industries. As production costs rise, and it takes longer to get a product into the hands of the customer, in turn, it takes longer to get payment in the hands of the business owner. If negative cash flow isn’t soon remedied, it can lead to a successful company facing insolvency, even if it has customers lining up for their product. Fortunately, with professional tailored advice from solvency experts, negative cash flow doesn’t have to signal the end of a company.

Whichever sector in which you operate your business, there are concrete steps you can take to recover from negative cash flow and ensure you aren’t one day scratching your head asking, ‘how can a profitable company fail because of cash flow problems?’

Regardless of your current situation, you don’t need to become one of the companies that failed due to poor cash flow. With the guidance of experienced insolvency professionals, your business can recover from negative cash flow and other indicators of risk in your business.

How Can Irwin Insolvency Help Ensure Your Business Success?

Can a profitable business fail because of cash flow problems? Yes, and many do. Your business doesn’t need to become one of that number. At Irwin Insolvency, we’re experts at helping businesses recover and restore profitability.  Contact Irwin Insolvency today for professional and tailored advice for your business success.

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About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency,
 rescue and turnaround.