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April 18, 2022

Cash Flow Problems Facing Small Businesses and How to Solve Them

Reading Time 6 mins

Positive cash flow is vital for a thriving business. And still, many companies fail to secure a positive cash flow. In this article, we will take a look at the reasons causing issues and potential solutions to improve the situation.

What is a Cash Flow Problem for Businesses?

Cash flow problems occur when businesses don’t have enough cash to cover their liabilities. When the outflow of cash exceeds cash inflow, businesses struggle with covering expenses and paying their debts.

A net cash outflow isn’t always an indicator of a company’s struggle with cash flow. It’s a typical situation when companies have net cash outflows, especially when making significant payments or dealing with seasonal fluctuations.

However, cash flow is problematic if the outflow exceeds the inflow. It means the company is using its reserves while not being able to meet its liabilities.

Typically, cash flow problems occur because of issues with invoicing and collecting accounts receivable, low-profit margins, or poor investments into the company’s optimization. But there are other reasons for cash flow problems too.

Why Do Cash Problems Occur

The most common factors to cause cash flow issues are:

  • not collecting payments on time;
  • poor inventory management;
  • unexpected expenses;
  • poor financial planning;
  • staff changes.

Let’s check in detail what can go wrong when operating a business and how these factors affect the financial health of the company.

Not Collecting Payments on Time

Most businesses consider an increase in sales of goods or services a good sign. And it is a good sign, but only if clients pay on time. A business can be successful on paper, but customers procrastinating problems is a huge problem.

Take a look at a company’s trade receivables collecting process. If it’s slow, it can “suffocate” a healthy cash flow. If no action is taken, it leads to problems with paying bills and bugging down business growth.

Poor Inventory Management

Managing inventory is one of the biggest issues. Not spending enough leads to not being able to fulfill customers’ needs. Spending too much on inventory is considered sending money down the drain.

Having too much stock in an inventory can be dangerous. On the one hand, a business has to include stock into its capital and pay taxes. On the other hand, it’s a stale inventory that isn’t bringing any money, only expenses.

Businesses having inventories have to be careful. The best way to avoid extra expenses is to develop an inventory management system.

Unexpected Expenses

Typically, extra expenses come up as an unpleasant surprise to those business owners who don’t create business budgets before the beginning of each fiscal year. Successful business owners create budgets and set a specific amount of money to cover unexpected expenses.

Absence of business budget leads to unpredicted expenses. As a result, when a piece of machinery breaks, it has negative effects on a business. Especially when the business already has problems with managing finance.

Poor Financial Planning

As mentioned, not having a business budget or not using proper financial planning tools can lead to problems. It’s critical to use financial mechanisms for an accurate cash flow forecast. That way, the company’s management can spot the problem before it’s too late.

Cash Flow Problems Facing Small Businesses and How to Solve Them

Staff Changes

Staff expenses may also lead to cash flow issues, especially when the company is rapidly growing. Getting a new customer may lead to a demand for new employees. But it’s impossible to pay salaries without having enough cash. It’s critical for company owners to consider this fact before expanding their businesses.

The Impact of Cash Flow Problems on Businesses

It sounds terrible not to have enough cash, but what exactly can happen to a business. Here are some potential problems caused by a shortage in cash flow:

  • Late or missed debt repayments. As a result, a company gains decreased credit ratings.
  • Decreased client satisfaction.
  • A company closure due to bankruptcy.
  • Lack of money on advertising and other competitive advantages.
  • Covering business expenses with personal funds without having cash.
  • Late payments to suppliers. As a result, the company has to deal with the worsening of business relationships.
  • Going into debt to cover business expenses.
  • Missed opportunities to improve and optimize the business because of a lack of investments.
  • Decreased workers’ morale because of unpaid salaries.

These are the most common issues occurring because of a lack of cash flow. Now let’s see how businesses can avoid these severe consequences.

Solutions to Cash Flow Problems

Now you know that cash flow can harm your business. Whether you are self-employed or own a small business with employees, it’s critical to take action to avoid cash flow problems. The following five tips can help you tackle common cash flow problems.

Develop a Short-Term Emergency Plan

Use separate columns for different business operations in a business plan. Consider separating processes, income, operations, expenses in a budget. Near each column, add how much it costs to support these business operations.

Determine the number of expenses each section generates. Categorizing such data gives business owners an important insight and projects potential future expenses under typical circumstances. Consider adding a section in a budget that requires funds for unusual situations.

Reduce Expenses

It isn’t easy to reduce business expenses, but it’s vital to go through all unreasonable costs. It takes time, but as a result, it’s possible to use these costs to optimize the company. Here are a few ways of bouncing back to healthy cash flow through reducing the following costs:

  • Discontinue temporarily (or for good) non-essential services.
  • Cancel premium non-essential services.
  • Reduce operating expenses.
  • Expand virtual services.
  • Consider lower-cost suppliers (at least temporarily).

Before considering decreasing staff, go for the above-mentioned alternatives.

Speed Up Accounts Receivable

It seems like an obvious improvement, but many companies ignore this step. To make clients pay faster, consider the following tips:

  • Send invoices immediately upon completing the order.
  • Ask for payments from past-due accounts.
  • Review a billing cycle and invoice payment terms.
  • Consider offering a deposit or small partial payments upfront.
  • Encourage early payments by offering discounts.
  • Offer several types of payment methods.

If you have several “problematic” clients that owe money, consider invoice factoring. In the case of invoice factoring, companies sell someone’s debt and receive immediate payment (around 80-90%). The debtor then has to pay this invoice factoring provider. When the debtor pays back the owed amount, you receive the rest of 10-20%, minus a small fee.

Negotiate Reducing Accounts Payable

Decreasing expenses is a great way to keep a positive cash flow. Having more working capital allows your company to prioritize essential expenses while preventing cash flow problems.

To begin, consider vendors and providers you work with for a while. Disclose your intentions about wanting to negotiate flexible terms or payment options.

If things are getting out of control, consider making the essential payments. Not making payroll guarantees a much bigger penalty than not paying for a cable bill.

Consider Borrowing

Borrowing money isn’t a bad idea to keep a positive cash flow. Some companies don’t have problems when asking for credit since they have a positive credit history. But even if it’s not the case, it’s possible to negotiate the terms with a financial institution by showing a clear plan of how you plan to overcome financial struggles.

When borrowing money, pay attention to interest rates, fees, and penalties in case of not paying on time. Another important tip is to analyze why a problem occurred in the first place before borrowing money. Without detecting and fixing the issue, borrowing money won’t help.

Cash Flow Management Software

Cash flow management software gives aid with managing the past, present, and future cash flow of a business. Management software automatically connects the balance sheet and the income statement from the accounting software. It also organizes cash flow statements and all reports, revealing any potential or existing problems.

There are different cash flow management programs. Here are a few examples:

  • QuickBooks Cash Flow enables users to see how the company is doing in real-time. It offers features to manage cash flow and make better business decisions.
  • Planful is a cloud-based financial management and analysis platform. The platform provides users with tools for continuous planning and cash management.
  • Anaplan is a platform that has a full suite of features for proper financial planning.
  • Cube is a dynamic financial planning platform. Cube also enables users to transfer data even from a spreadsheet.

Management software enables business owners to make better financial decisions based on a current situation. Users have an option to plan for the future and avoid negative cash flows. Another good option to manage cash flow is hiring an accountant.

Final Thoughts

As you see, there are different ways to solve cash flow problems. In most cases, it’s possible to take time and analyze unreasonable costs to cut them. If your problem can’t be fixed by using tips from the article, get the help of a professional.

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Author: Charles Lutwidge

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