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8 Common Cash-Flow Problems Facing Small Businesses

By Mike Rand Reviewed By Mike Lucas
By Mike Rand
By Mike Rand Reviewed By Mike Lucas

Why do companies have cash-flow problems? These issues happen when there isn’t enough money coming into a business to pay operational expenses or make necessary investments. The cash that comes in is essential to keeping your business afloat.

Here’s another way to look at it: Too much money is moving out of your business and not enough is moving into it. Cash-flow issues also may happen when a business is looking to expand but lacks enough capital to do so.

Causes of Cash-Flow Challenges for Small Businesses

Small businesses are especially susceptible to cash-flow problems because they depend so much on incoming cash and financing to stay afloat. In fact, cash-flow problems are the top reason small businesses fail. According to Visual Capitalist, an investment- and business-focused online publisher, 82% of small businesses fail because they experience cash-flow issues.

How can cash-flow problems lead to business failure? Many factors can cause cash-flow challenges, some of which are outside of your control as a small business owner. But cash-flow problems are often the result of common problems you can fix or avoid.

Here are some of the most common sources of cash-flow problems for small businesses.

Impulsive Spending

It can be difficult to determine which investments are essential to your business. If you don’t plan accordingly, you could over-invest and go over budget. Businesses that overspend on software, office space and perks will often run into cash-flow problems.

The business services landscape is changing all the time. It isn’t uncommon for small businesses to get locked into contractual agreements with other companies that don’t provide a return on investment. Some solutions may become obsolete and others may seem like a good idea at first, but don’t turn out to provide any value.

Your first step should be to establish a budget for spending based on cash flow. This will help you set a baseline for your spending habits. Then, create a plan for your spending. For example, if you intend to invest in a new software environment, map out beforehand how each piece of software will work together to drive value.

Businesses that overspend on the latest technology may run into cash-flow problems.

Overestimating Future Sales

If your sales numbers have been on an upward trend for months, it can be tempting to assume they’ll stay that way. Some small businesses run into cash-flow problems because they wager the sales they expect tomorrow to fund the investments they want to make today.

This is a risky strategy. You can’t guarantee future sales, and sometimes a sunny perspective can cloud your judgment.

Because you need a sales forecast to create a business plan, make sure your estimates are based on past data, if you have it. Break your sales down into unit parts and use averages to keep your sales estimates realistic.

A Bad Pricing Model

Pricing products and services is one of the most challenging components to nail down when running a small business. While it can be relatively easy to determine pricing if you’re selling commodities or consumer goods, it gets fuzzy when you’re selling a unique service or product.

If you price too high, you could spook buyers. If you price too low, you could miss out on revenue. Both problems will impact your cash flow.

To get the pricing right, pay attention to your competitors and any factors that may affect your market. You don’t necessarily want to undercut your competitors’ prices, especially if your product is superior. But you’ll need to keep your price attainable for your target market if you want to make sales.

Slow Invoice Payments and Poor Receivables Management

If you’re still using paper invoices and accepting checks to receive payments from your customers, it may be time to upgrade how you accept payments. Instead of using a paper invoice, invoice electronically and make it clear that payment is due at a specific time. Paper checks can take as long as a month to fully “clear.”

Another common problem is inaccurate and inefficient accounting. Some small businesses use outdated technologies or even pen and paper to keep track of their books and manage their receivables.

Thanks to the widespread adoption of payment-processing technologies, slow invoice payments are becoming less and less of a problem. Indeed, credit cards, debit cards and other types of electronic fund transfers are much faster and more reliable. They also create a more reliable record of the funds you’ve received.

Pricing products and services is one of the most challenging components to nail down when running a small business.

Poor Employee Management

Employee salaries and wages are a large part of your outgoing expenses. Poor employee management can, therefore, lead to cash-flow problems — and possibly layoffs.

For example, if you rely on shift workers to operate your business, overbooking employee shifts could lead to unnecessary expenses that don’t translate into returns. High rates of employee turnover, job redundancies and a lack of automation also come with avoidable costs.

To resolve these issues, you can cross-train employees to fill more roles as-needed in your business. If you’re losing employees quickly and often, create more favorable working conditions to reduce turnover. Also, introduce new technology to automate repetitive processes and help you manage employees more effectively.

Seasonal Challenges

Many small businesses are affected by seasonal changes in sales and revenue, which impact cash-flow. Businesses that sell consumer goods, for example, can expect increased sales during the holiday season and slower sales during other times of the year.

The best way to avoid seasonal cash-flow problems is to plan your investments accordingly. Use data from past years to plan how you spend and save cash.

Inadequate Cash Reserves

Every business should maintain a cash reserve to cover expenses during slow or difficult times. Without one, you could be forced to take out expensive loans to cover costs. If you accumulate too much debt in this way, you could be forced to declare bankruptcy if you can’t make the payments.

To create a cash reserve, first determine how much you spend each month. If you operate a seasonal business, calculate your expenses for different times of the year and use the most expensive season as a model. Then, put money aside incrementally until you have a safety net.

The size of your reserve depends on what makes you comfortable. Many financial experts recommend consumers put aside emergency funds to cover 3 to 6 months of expenses.

Difficulties in Obtaining Financing

Many small businesses depend on financing products such as business loans to operate and expand. Obtaining financing may be difficult for some companies, resulting in a serious cash-flow problem.

A business owner could be denied a business loan for a variety of reasons, including bad credit, no credit or inadequate collateral. You could even be denied if the lender doesn’t approve of your business plan. Many banks won’t approve a business loan that could solve cash-flow problems because the business in question is currently experiencing cash-flow problems.

If you’re being denied for a business loan or a line of credit, your best move is to find out why and work to remedy this issue. It can take time to build credit, but you can also try to cut costs to increase cash flow or make changes to your business plan to make it stronger.

You can also look for alternatives to conventional financing such as an online marketplace. Some business loans are available even to businesses with bad credit and some online lenders consider factors other than credit ratings to determine if a company qualifies for financing.

Fixing Your Cash-Flow Problems

Every business faces difficult times at some point. With the right steps, you can get through them and keep your business growing.

There are plenty of cost-cutting measures you can take to fix cash-flow problems. Sometimes, an adjustment in your business strategy is all you need to stay cash positive.

If you need to make new investments to solve your cash-flow problems, you can consider taking out a loan to do so. Just be sure to do a cost/benefit analysis of your loan and your investment to make sure it’s a good solution.

Mike Rand Contributing Writer at Fast Capital 360
Mike Rand is a contributing writer for Fast Capital 360. He is a freelance writer and content marketer. A published author, he writes about technology, marketing and law as well as small business management, business operations and startups.
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