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Common Small Business Cash Flow Problems and How to Solve Them

Common Small Business Cash Flow Problems and How to Solve Them

It may not be the most exciting part of running a business, but tracking the money coming in and out of your account is vital to your success. Statistics show that while 38% of small businesses fail due to running out of cash, less than half (45%) of small businesses monitor cash flow, creating and reviewing cash flow statements.

While credit is essential, eventually you’ll need liquidated capital (or cash) on hand to pay your bills. Even a profitable business can get itself into trouble by mismanaging its cash flow and failing to meet all of its expenses. Without cash to spend, you might:

  • Miss payments, triggering late fees.
  • Be unable to acquire the stock or raw goods you need to keep up with demand.
  • Fail to take advantage of potential growth opportunities.
  • Get yourself into unnecessary debt through expensive short-term financing.

Cash flow management refers to organizing incoming and outgoing funds to ensure you always have the funds on hand to cover your expenses. It requires understanding upcoming bills, projections for future revenue, and any delays in your chosen payment methods.

However, the unexpected is always waiting around the corner when it comes to running a business. Even with cash flow considerations in place, you can run into problems. Listed below are four of the most common small business cash flow problems and tips on how to solve them.

  1. Unexpected accounts payable

Whether it’s machinery failing, damaged inventory, broken office equipment, or just a sudden increase in rent or supplier costs, an unexpected bill can throw your cash flow plans into disarray. However, the best way to handle an out-of-the-blue bill is to always stay on top of your cash flow. For example, you can amplify your cash flow with this bill-paying service, improving your flexibility to find the best solution if an unpredictable event occurs.

Another solution is to expect the unexpected by building an emergency fund to get you through tough situations. Assess your operations and set a goal for the cash funds you want to have in reserve. This could be based on the cost of your critical infrastructure (e.g., how much you would need to replace machinery quickly) or your incoming revenue (e.g., two months or more revenue in the case of a sudden sales drop).

Set a goal and start saving funds each month (even just a small amount) until you have a safety net you’re comfortable operating with. Set a recurring payment to send funds to a separate account so that you won’t accidentally start spending cash reserves on day-to-day expenses.

  1. Profitability problems

Whether it’s caused by declining sales or higher costs squeezing your profit margin, many businesses struggle with profitability problems that have knock-on effects on cash flow. When it comes to solving profit problems, you have two sides of the equation to improve - increasing revenue and reducing expenses.

To increase revenues, consider alternative profit-making opportunities, such as developing your products, targeting new markets, trying new pricing, or offering targeted discounts. While lower prices might reduce profit margins, if it’s combined with reduced expenses, you may be able to maintain a similar percentage.

Reducing expenses and cutting waste is often the key to sustaining your business and achieving profitability. Stop any nonessential services, move to lower-cost suppliers, review payroll, and consider letting staff go. Anything that reduces operating costs without affecting the customer experience should be considered.

  1. Uncontrolled growth

While it’s the goal for most small businesses, growth is not always a good thing. Expanding a business means scaling up operations, opening new locations, hiring new employees, buying more equipment, and more. But when it happens too quickly or without a proper plan in place, it can end up backfiring.

That's a lot of expenses, and without a proper plan in place, you can quickly run into cash flow problems. Growing a business is often accompanied by borrowing funds to cover all of the costs. Whether it’s from investors, acquiring a loan, or a new line of credit, there are always risks associated with spending other people’s money.

Perhaps you overestimated the demand for your product or the costs of expanding spiral out of control. You’ll need a comprehensive business plan to ensure you don’t run into significant problems. There’s nothing wrong with taking time to consider all the costs involved and getting your finances in order first. Growing too quickly has been the downfall of many businesses.

  1. Late incoming payments

Waiting to be paid is no fun. However, in many markets (especially B2B markets), offering goods or services on credit is expected. Without upfront payment, businesses can get into cash flow problems due to late accounts receivable. You plan out your upcoming bills, and then a customer misses a deadline, and you’re left scrambling to find funds.

However, there are several methods you can employ to minimize late incoming payments, including:

  • Sending accurate invoices as early as possible.
  • Offering multiple payment options to make it as easy as possible for clients to transfer funds.
  • For larger projects, break down payments into multiple installments or ask for a deposit or retainer.
  • Incentivize early payments through small discounts.
  • Disincentivize late payments through additional fees or interest.

Minimizing late customer payments often comes down to reviewing your payment terms. Ensure clients are fully aware of them before working with them.

Solving cash flow problems one step at a time

Less than half of small businesses even track cash flow. However, since you’re here, reading about possible cash flow issues, it’s safe to assume you’re a proactive planner looking to solve problems before they even arise.

With that attitude, you’ll go far. Much of cash flow management is about putting in the extra work and planning ahead. It’s about organizing your incomings and outgoings to ensure you don’t get left short. Furthermore, if problems do arise, it’s important to have concrete plans in place. This will help you to stay ahead of your upcoming expenses.

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