How a small business can solve these 10 common cash flow problems

10 Common Cash Flow Problems For Small Businesses and How to Solve Them


Good cash flow management is as crucial to a company's health as blood flow is for human beings, and poor cash flow management is a significant reason why some companies fail rather than flourish. Because of its importance, setting up proper cash flow must be a priority when starting a company. 

Luckily, most cash flow problems can be avoided with the proper preparations, a strategic focus, and a top-notch accounting system. Even established companies must monitor cash flow regularly and adjust to anticipate potential problems.

A business can experience cash flow trouble if it spends more money than it earns in a month or quarter. Clearly, no business owner wants to operate in the red. So, what are the major causes for small businesses and startups to experience cash flow problems? What are the common issues that companies experience? 

This article will examine ten cash flow problems and methods for small businesses to resolve them.

10 Cash Flow Problems in Small Business

A company's cash flow can ebb and flow from month to month. Cash flow refers to the funds that "flow" in and out of your business.

Without sufficient cash flowing into a business, it is challenging to generate profits. Cash flow problems in small business often arise when the business owner spends too much to cover expenses without sufficient revenues from sales and services to meet those costs. If this situation continues for too long, the business may accumulate significant debt, and that could lead to bankruptcy. That is why establishing a robust accounting system to track income and expenses, along with a cash flow statement, after launching your business is essential for managing the company.

Quite simply, cash flow is the delicate balance of managing expectations for sales versus anticipated monthly expenses such as rent, employee salaries, and materials for your products. Both startups and established companies must work diligently to avoid cash flow mistakes.

1. Too Much Startup Spending

When launching a business, it is essential to establish a realistic budget (with wiggle room for unexpected expenses) to help prevent cash flow problems right from the get-go. Estimates that are not viable and insufficient cash reserves could spell doom for your business, and you could run out of money before you launch the company.

Startup companies often waste money because they do not pay attention to all the costs of the company's expenses relative to the pricing of their products. 

The solution: It is crucial to keep a close eye on spending and ensure that your earnings will cover those costs. One way to accurately estimate startup costs is to access a Small Business Administration worksheet to help you create a startup budget.

2. Insufficient Cash Flow Budget

There is no doubt that companies must closely monitor cash flow, either daily or weekly. Business owners must also keep track of their earnings relative to their expenditures. By keeping accurate records, you will not be caught unawares by a sudden lack of funds, and you will also learn the strategies that work best for your company.

Ideally, business owners will begin to maintain a record of the expenses as soon as they develop a business plan. From startup capital to the very first sale, it is important to grasp when and how your money flows in and goes out to aid the management of operating cash flow. You must be careful not to create a negative cash flow situation at the end of the month or quarter by paying for invoices with checks or using cash for large business expenditures without properly recording those expenses.

The solution: The best way to monitor cash flow is to establish an accounting system to track income and expenses soon after launching your business. This will assist you to avoid operating without enough cash flow. Create a basic spreadsheet system of income and outgoing payments until you can advance to a more robust accounting software system for recording accounts payable and receivable.

3. Overestimating Future Sales and Growth

It is simply not wise to have unrealistic expectations about your company's growth. Instead, you have to check your financial records, analyze the data, and carefully develop your estimates about your growth projections. If your analysis does not back your intuition that your sales are about to boom, then you simply cannot assume that they will.

Most businesspeople launch a company hoping that their product or service will be an immediate hit, but it can take a few years to establish your business. If you are not prepared for a more extended period to achieve profitability, that can lead to cash flow problems from the beginning of your company. 

The solution: Business owners must establish a realistic time period for reaching profitability. As a result, it is essential to maintain sufficient cash flow to keep your company solvent as it grows.

4. Collecting Receivables Too Slowly

Your sales may be booming, but if your customers are not paying for your goods and services in a timely manner, it can be detrimental to your cash flow. When you make a sale, you need to know that you will receive payment in return to invest in your future business endeavors properly. If you are not getting paid for your receivables on time, it can curb your company's growth and not provide the funds necessary to advance your company's sales and profits. Cash flow problems from slow receivables collection can also impact your ability to pay bills on time. 

The solution: You must establish a receivables process and only give credit to customers who consistently make prompt and on-time payments. As a result, you will not incur cash flow problems due to customers who do not pay receivables on time.

5. Growing Too Quickly

It might seem counterintuitive, but if a company's sales are rising extremely fast, that can lead to cash flow issues and stymie corporate growth.

For example, a new company may sign a large, new client. To take care of this client, however, the owner must buy expensive new equipment to upgrade the factory in an effort to increase the output of the company's product. 

Unfortunately, there may not be enough cash to make the payments on the equipment because the client has not yet reimbursed the company for the first invoice. As a result, the company is squeezed into a bad cash flow position.

The solution: To alleviate this kind of issue, the company can obtain a line of credit from the bank, such as an overdraft or short-term loan. In many cases, this can be a practical option because banks are more agreeable to lend to a business if they are presented with a draft service contract or letter of intent.

Once the client pays for the first shipments of products, the company can pay the debt. As a result, the company just pays interest to the bank for the amount of time when the cash was necessary.

6. Low-Profit Margins

A company must keep close tabs on its profit margins, which is a crucial metric to know when analyzing prices on your products or services. The profit margin indicates the percentage of profit your company generates from its operations.

A low-profit margin shows that either costs are too high, prices are too low, or both. A company will struggle with cash flow issues if it lacks a healthy and sustainable profit margin. 

The solution: Analyzing your profit margin and tracking it over time can provide insight into your company's pricing and cost details to determine if you need to make changes to improve your business cash flow.

7. Managing Receivables and Payables

Factors that can negatively impact a business also include outstanding receivables. A receivable is a balance of money due to a company. An outstanding receivable is the term used when a business has provided services or sold products to a client or customer, but the client has not yet paid the company for those services or products. 

According to Forbes, 33% of all U.S. small business owners estimate their companies have more than $20,000 in outstanding receivables, and the average outstanding receivables for U.S. small businesses is about $54,000.

The solution: Permitting customers to pay receivables late does not help your company or them. Delinquent receivables could negatively impact your ability to provide services to new customers. Due dates for receivables must be strictly enforced, and penalties for late fees must be administered to maintain positive cash flow.

8. Not Keeping Track of Expenses

Soon after launching a business, a priority must be establishing an accounting system because it can ensure that you avoid operating without sufficient cash flow.

Many business owners do not want to take care of their businesses' bookkeeping because it can be tedious, takes a considerable amount of time, and is not productive. This type of thinking is a mistake.

The solution: Bookkeeping and tracking expenses are crucial to the operation of your firm because you will not be able to track payments, deposits, or any financial activities accurately. It can also preclude you from obtaining financing or even paying taxes correctly.

9. Being Too Flexible with Past-Due Receivables

Developing excellent customer relationships can be difficult and take a long time, especially for small businesses serving a local community. To attract loyal customers, companies will strive to provide excellent services and offer flexible payment options to loyal customers. However, if you allow customers to pay past-due receivable invoices far beyond the due date, you place yourself at a cash flow disadvantage.

The solution: Due dates and penalties for late fees must be enforced to keep a positive cash flow.

10. Forgetting about Seasonality

Cash flow problems are common during a company's offseason. For example, ice cream manufacturers and stores experience a sharp drop in sales during the winter. To effectively manage a company's cash flow, a business owner must know their company's off-season and plan for it.

Before investing a large amount of your personal money into your business during a slow month (or several months) to stay afloat, it may be worthwhile to acquire working capital solutions. 

The solution: For example, a business cash advance or business line of credit can help protect personal assets while keeping your business afloat until sales pick up again.

All Businesses Will Experience Cash Flow Problems From Time to Time

Managing the inflow and outflow of cash of a business is one of the most difficult challenges a business owner faces. Since there are so many variables to track (payroll costs, operating expenses, fixed asset purchases), a lot of business owners are not tracking this properly and it can cause major problems for them.

At Punch, we make sure you are regularly receiving cash flow statements and reviewing them with an experienced CFO. We analyze your cash inflows and outflows to provide you with your financial position timely. Our goal is to help you understand how your money is being utilized and how efficiently.

Let’s connect to give you a customized quote and free consultation. You have nothing to lose but so much to gain.

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