Common Cash Flow Problems in Small Business & How to Solve Them

The term cash flow is quite significant for any business enterprise, but the impacts are different. A positive cash flow keeps your business steady whereas a negative cash flow would result in severe loss. It is often seen that the cash flow problem is the major contributor to business failures. Needless to say, planning the cash flow is vital for the survival of the business.

It is essential to monitor cash flow position regularly to avoid any problems. In this article, we have listed some common cash flow problems in small businesses. Check out the article to learn how to fix these problems.

What Are Cash Flow Problems And Its Causes?

Deficiency of liquid cash or increased cash outflow as compared to cash inflows leads to cash flow problems. This is a serious issue for small businesses, as it becomes difficult for them to meet their liabilities and pay their debts or other expenses.

There are certain specific causes that result in cash flow problems in small businesses. Some of them are:

  • A low-profit margin with high overhead costs will drain out money rather than flowing it inward.
  • Bad debt may rise due to an uncontrolled credit system.
  • Disorganized bookkeeping misleads the business that would be a probable cause for cash flow issues.
  • Inefficient tracking of day-to-day cash flow:
  • Spending excessively during the initial phase of business could cause a serious impact on cash flow.
  • Inaccurate revenue forecasting of future sales could lead to cash flow issues.
  • When a business is suffering from cash flow issues you must be ready with enough reserves to support your business. Not having one would lead to a financial breakdown.
  • Misjudgment of the market and keeping unnecessary inventory that isn’t selling would lose out revenue.
  • Credits going out of sync and improper cash flow tracking could lead to serious cash flow problems.

Let’s discuss more on this in the below section!

Common Cash Flow Problems

Cash flow problems bring down the financial status of a small business enterprise. To deal with this issue, it is important to know the common types of these problems. Here are some of them!

1. Underestimating Startup Cost

For a startup, it is necessary to have an accurate estimate. A realistic budget from the very beginning can help you to establish your business safely without cash flow issues. Unrealistic estimates with no room for average along with a lack of cash reserves would bring about various challenges on your way to success. Creating your startup budget efficiently is highly recommendable to safeguard your business from unexpected circumstances. Moreover, this also saves your cash from getting wasted on unnecessary expenses.

2. The early expectation of profit

Eagerness to enhance business profitability is quite normal, but that should not be so much that it ruins your business. According to a survey it is found that nearly 84% of profit is achieved in the first four years. So you must give your business enough time to grow before expecting a profit. Until then you must have enough cash that would support your business. Also, a realistic time frame for boosting your business profitability is required for controlling cash flow problems in small businesses.

3. Lack of Cash Flow Budget

A business does not only involve earning a generous amount of profit. It also involves certain necessary expenses that keep your business running. To ensure that you have enough money to support such expenses you must have a proper cash flow budget. Create a route map that would enable you to figure out the expense and the revenue that can be earned for the next 30 days so that you can plan out your cash flow budget accordingly. Not creating a cash flow budget may bring about serious challenges in your upcoming days.

4. Overlooking The Overhead Costs

Whether small or big business, the overhead cost is a general expense that cannot be overlooked. But if you have a small business and your overhead costs are too high, then there is a probable chance that you may suffer severe loss. High Overhead costs may involve high rental costs, travel expenditure, car lease, etc., which may eat away all your profit. These might also lead you to sell more stuff to balance your other expenses. Hence, reducing your overhead cost is a must to control your cash flow issues.

5. Delayed or slow payment clearance

Collecting receivables too slowly is one of the major challenges that can lead to cash flow issues. Delayed payments from your customer can put you in a tough situation. Receiving payments too slowly will create difficulties in running your business. This situation can be avoided by extending credits to only those customers who are punctual about payments. This way the cash flow issues can be avoided by putting a receivable process in place.

6. Growing too Quickly

Being a small business enterprise getting a large client contract is unexpected for you. Taking up the project leads you to recruit additional staff to get the job done on time. But this creates a big problem when payday comes into the picture. You don’t have enough cash reserves to cover the additional wage. To solve this problem you can go for short-term loans or apply for an overdraft from the bank. Once you get the payment you can return the amount. This way you can rule out the chances of cash flow issues and get more projects.

7. Low-Profit Margin

Pricing is an art that plays an important role in the growth of your business. Profit margin is an analytical tool that varies according to your pricing rates. A low-profit margin marks that either your pricing is too high or too low. To battle the cash flow issues you need to have a sustainable profit margin. Reviewing and tracking the profit margin over time and taking necessary steps can improve your business cash flow.

Probable Effects of Cash Flow Problems in Small Businesses

Impacts of cash flow problems could be adverse on small businesses. As a result, a shortage of cash could hamper the merchandise of goods and services. Let’s figure out the possible effect of cash flow problems in small businesses.

  • Shortage of cash may lead to additional debt to cover business expenses.
  • Insufficient cash may cause late payments to suppliers that would result in strained relationships.
  • Missing out on debt repayment could be another effect of the cash flow issue.
  • Shortage of cash would affect your ability to invest in marketing campaigns, which could result in missing out on opportunities and competitive advantages.
  • Cash flow problems even hamper labor payment that would demoralize the employees.
  • Lastly, cash flow problems may likely cause reduced customer satisfaction and business closer due to insolvency.

Steps to Fix these Cash Flow Problems

If you notice cash flow issues understand it’s the alarm of upcoming business losses. To safeguard your business implement the following steps to prevent cash flow issues.

A proper cash flow budget

A proper cash flow budget is a necessary step that can protect your business from cash flow problems. Creating a cash flow budget will help you understand the monthly surplus received and cash deficits. Also, this provides a clear insight into the business budgetary status so that you can figure out how much cash would be required for your business in the coming years.

Cut down unnecessary expenses

Expenses can only fuel your cash flow problems. To bring the situation under control, monitor your business expenses thoroughly and cut down unnecessary expenses.

Fasten the payment process

Invoicing clients may seem easy but waiting for the payments is daunting. This creates a cash flow disaster which worsens the situation. For such businesses suffering from cash flow issues getting paid faster is very important. Switch to more sophisticated online software that can ease up your job regarding invoices and payments. Billbooks is one such platform that brings the invoicing process to your fingertips. Sending reminders or auto-billing, you get all sorts of financial accounting support from Billbooks. This way you can fasten your payment process and avoid cash flow problems.

Have access to cash

In a situation where there is a shortage of cash due to delayed payment or over-expense, be ready with a backup plan. Always have access to a cash reserve which can be your fund or a short-term loan taken from the bank. This will help you out in various critical conditions.

Wrapping up!

Cash flow problems in small businesses could be challenging. In some cases, it may seem unavoidable but in-depth analysis and then navigating through the deep holes would be of much help. Improve your business accounting process, applying for loans, or auditing the inventory- these would probably reduce the burden of cash flow impact on your business.