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How Running a Cash-Based Business Can Hurt Your Operations

By Matt Duczeminski Reviewed By Mike Lucas
By Matt Duczeminski
By Matt Duczeminski Reviewed By Mike Lucas

As the owner of a new business, one of your top priorities will be to determine how your customers will pay you.

To be sure, many modern businesses offer a few different payment options, such as via credit cards or mobile payments. (This shift toward cashless, digital payments has only been exacerbated by the COVID-19 pandemic.)

But, a whole lot of consumers still pay with good, old-fashioned cash. 

As a 2020 report from the Federal Reserve Bank of San Francisco found:

  • Consumers used cash for 26 percent of all payments, consistent with the finding from 2018
  • Cash is used heavily for small-value payments, about 47 percent of payments under $10
  • Sentiment toward cash payments has remain steady since at least 2018 for “all age cohorts”

In many cases, operating as a cash-only business can actually be a viable option. Or, at least, it might seem viable at the moment — but likely won’t be for long.

We’ll discuss the key reasons that operating a cash-based business can hinder your growth — and can even put your company in danger.

Why Should You Operate a Cash-Only Business in 2021?

Despite the prevalence and abundance of payment options available today, there are still some reasons you might decide to accept only cash from your customers.

Customer Preference

First of all, it may be more acceptable for your business to be cash-based in the eyes of your customer.

Some examples of successful cash-only establishments:

  • Service-based companies, from plumbers and electricians to babysitters and tutors
  • Cafes, coffeehouses, and small eateries
  • Locally-owned retail shops

If your target audience actually prefers to pay in cash, this is a key sign that your company may be able to succeed as a cash-only establishment.

Keep Simple Transactions Simple

In many cases — especially in the industries mentioned above — there’s just no need to overcomplicate your payment processes.

There’s no need to figure out which other payment options to provide — or how to actually use each of these alternate payment services. This alone can save time and energy on your end.

What’s more, the sales you make are typically finalized right at the point of purchase. In contrast, purchases made digitally or via credit card are often subject to chargebacks, returns and other such issues.

Minimize Processing Fees

Accepting various payment methods means you’ll be paying processing fees on every sale you make.

In many cases, you’ll pay a monthly fee to your payment gateway provider regardless of how many transactions the gateway was responsible for.

For small, growing businesses, there may be more productive ways you could be investing this extra cash. Going cashless eliminates these processing fees, and gives you more control over your incoming revenues.

Streamline Accounting Processes

This just makes sense:

The fewer payment channels you have, the easier it will be to keep track of your accounting.

For one thing, it’s simply less time-consuming to account for payments made via one method than via two or three additional channels. Moreover, cash-only accounting is much less complex, overall.

(Note, however, that things are only this simple if you keep up with your accounting processes. As we’ll discuss, a misstep here can be disastrous for your business.)

The common theme here is simplicity.

If you’re intent on keeping your payment processes as simple as possible, staying cash-only is perhaps your best option. 

As long as your customers are fine with it, and you’re able to keep your accounting in order, a cash-only policy can allow you to focus on the many other factors involved in growing a small business.

One hand offers a few dollar bills to another hand.

How a Cash-Only Policy Can Hurt Your Small Business

On the other hand, a cash-only policy will almost definitely cause more problems for your business than it solves over time.

There will come a time when adding a bit of complexity to your payment processes will be necessary to streamline other areas of your business, however. Similarly, you’ll reach a point where being too simplistic in your approach to payments will actually make things much more complex on the whole.

With that in mind, let’s dig into the key downsides to keeping your cash-only policy in place for too long.

Lost Sales and Defecting Customers

Unfortunately, many potential customers won’t end up converting simply because they don’t have cash on hand.

For one thing, you have next to no chance of converting those who never carry cash with them. Even if they otherwise match your target persona to a T, they can’t become a paying customer if you only take cash.

You can also cause frustration for those who may be short on cash at the present moment. At these times, the customer will ultimately have three options:

  • Use the automated teller machine — and rack up yet another transaction fee
  • Trek all the way back home, then back to your storefront
  • Go somewhere else that accepts a more convenient payment method

Whether they follow through with their purchase or not, the friction caused by your cash-only policy will cause them to think twice about returning to your company in the future.

Security Issues

With thousands of dollars in cash coming through your business on a weekly basis, a number of security-related issues can arise at any time.

Counterfeiting, for example, has seen a recent surge: As KOAA News reports, Colorado law enforcement has deemed counterfeiting “out of control”. If your employees are ill-equipped to detect phony bills, your cash-based business will always be susceptible to losses via counterfeiting.

Theft is another issue that will continuously plague your cash-based business — in multiple ways.

For one thing, it may become well-known around your area that your storefront holds a fair amount of cash on-site. This, unfortunately, can put a pretty big target on your back and will force you to invest in some advanced security equipment to keep your earnings safe.

The California Restaurant Association says employee theft is an even more pressing threat to cash-based businesses. With cash changing hands during every transaction, it can be pretty easy (and tempting) for nefarious employees to skim off the top over time. Even honest employees can make cash-related errors, too. A miscalculation here, a misplaced stack of cash there…it can all add up to major losses for your business over time.

Again, security cameras and the like will be necessary to keep things in check, and to ensure your earnings end up where they belong.

In truth, security is always an issue for small businesses, no matter what payment options they offer. Still, the physical nature of cash and accompanying transaction records will put your business at risk for as long as it’s in operation.

Inefficient and Inconsistent Processes

Speaking of the physical nature of cash, it’s worth pointing out how inefficient cash-based transactions (and overall operations) can be.

Looking at your individual customer engagements, a number of things can cause friction throughout the sales process. Something as simple as a lack of change in the cash drawer can hold up your line, causing frustration for your customers — and potentially lost revenue for your business. Employee error (e.g., giving back too much change) also can do ongoing damage to your business while also remaining undetected over time.

Behind-the-scenes accounting processes are much more time-consuming for cash-only establishments. Those in the very early stages of digital transformation will find it especially time- and resource-consuming to track purchases and cash flow.

In contrast, accepting digital payments paves the path toward automation for both the front and back end of your payment processes. This will make for more efficient and consistent operations across the board.

A credit card has been inserted into a chip reader to process a payment.

Potential for Audits From the IRS

It’s common knowledge that small, cash-only businesses tend to raise suspicion from the Internal Revenue Service.

Unfortunately, this means that even straight-shooting cash businesses can be chosen for an audit at almost any time. 

(And, of course, if you actually are using your cash-only business to avoid taxes, you’ll have much more to worry about in the near future.)

Even if you have your records in order, having to deal with an audit can be a time-consuming — and incredibly stressful — experience.

And, well, that’s a big “if.”

Keeping your records in order at all times will be a pretty difficult order to fill. With so much to keep track of, it’s all too easy for miscalculations and errors to go unnoticed until you’re essentially forced to take a magnifying glass to the situation.

Of course, preparing for an audit yourself pales in comparison to having the IRS find discrepancies in your records. Depending on the nature of the mistake, these discrepancies can cost your business in the form of additional taxes owed, late fees, and fines. What’s more, your business may stay under the watchful eye of the IRS in the years to follow, as well.

It’s a bit of a double-whammy for cash businesses that can easily be avoided by adopting digital payments into your operations. By automating and optimizing your payment and recordkeeping processes, you’ll minimize the chances of being audited at all — and will also make the experience as painless as possible should it happen to your business. 

Fewer Avenues for Expansion

As we said at the beginning, sticking with a cash-only policy can actually hinder your business from future growth.

Basically, staying cash-only relegates you to just one sales channel: Your storefront.

Online orders, mobile orders, even orders by telephone are all off the table here. If your customers want to buy something from you, they’ll have to come into your brick-and-mortar location, or otherwise connect with a sales representative in person to conduct the transaction.

Think of the lost opportunities here:

  • Retailers miss out on potential online sales from non-local audiences
  • Service providers can’t automate their scheduling and reservation processes
  • Local eateries can’t partner up with delivery apps and services

Yes, there’s certainly more to making these things happen than offering digital payment options. But they simply cannot happen at all without such options in place.

If you’re looking to expand your reach and enhance the value you deliver your audience, staying cash-based will only get you so far. By going digital with your payment options, you’ll open up multiple avenues leading to growth for your business.

Fewer Financing Options

Staying on the subject of growth, cash-based businesses can sometimes have trouble in securing loans and other types of financing.

Generally speaking, banks are often a bit stricter when it comes to providing loans to cash-only businesses. To ensure your loan application goes through without a hitch, you’ll need to provide clear, accurate, and up-to-date records proving a positive cash flow and overall financial situation.

(Yes, this information is required from all loan applicants. But, as discussed earlier, actually keeping these records and providing them with clarity is a time-consuming proposition. Even then, the bank could simply reject your loan out of utmost discretion.)

Your cash-only business also will be unable to secure certain types of financing, too. Merchant cash advances, for example, operate by taking a percentage of a business’ credit card sales. Obviously, if you don’t allow your customers to pay via credit card, MCA providers won’t be able to collect on their end. Clearly, they aren’t going to do business with your company.

Whether you’re looking to expand your business or save it from a dire financial situation, you may find yourself stuck between a rock and a hard place if your entire company is built on cash only.

Should You Run a Cash-Only Business in 2021?

How you answer this question depends on what you’re looking to get out of your business, overall.

Say you’re looking to keep things simple, serving a small, local audience while making a modest living. It’s certainly possible to find success as a cash-only entity. Similarly, say you’re just looking for a side gig or perhaps temporary work as a freelancer. Going cash-only can allow you to focus on honing your craft and serving your customers.

But, if you’re looking to ramp things up in almost any way, you’re going to need to accept more than just cash from your customers. Although offering more complex payment options may not be necessary for your company’s current situation, the same can’t be said for where you see your business in the future.

Matt Duczeminski Contributing Writer for Fast Capital 360
Matt Duczeminski writes about business finance, business ownership, entrepreneurship and customer relationship management.
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