Did you know that 20% of small businesses fail in their first year, 30% close their doors in the second year, and 50% fail after 5 years in business?

One reason that small businesses fail is the lack of cash flow. However, there are many ways to prevent cash-flow issues or minimize its impact on your business. In this article, we’ll discuss the causes of small business cash-flow problems and how you can solve these challenges.

Why Do Companies Have Cash-Flow Problems?

“An ounce of prevention is worth a pound of cure” — understanding the causes of small business cash-flow problems can help a business owner nip them in the bud and prevent them from negatively impacting the company. Let’s look at some common reasons why small businesses encounter cash-flow challenges.

Causes of Cash-Flow Problems

  • Overestimating future sales volumes: revenue forecasting is particularly difficult during the first few years of business because there’s no past sales figures or experience to draw from.
  • Spending impulsively during the startup phase: distracted by “bright shiny objects” and not spending the available capital strategically on tools and services that yield high ROI.
  • Not staying on top of past-due receivables: the lack of comprehensive late-payment penalties and collection policies often causes small businesses to not getting paid on time.
  • Not tracking day-to-day cash flow: if you don’t keep track of the movement of cash in and out of your business regularly, you may not be able to catch cash-flow problems and nib them in the bud.
  • Not having a cash cushion: it’s not if, but when, a small business runs into cash-flow problems. Without a reserve to draw from, you may not be able to get through the rough patches when sales are unexpectedly slow.
  • Low profit margins: whether it’s because of high overhead, costs of products or tax bills, you may find that more money is going out than coming in — even if you’re making a lot of sales.
  • Unnecessary inventory: misjudgment of market demand often leads to cash being tied up in stock that isn’t selling. Often, you not only lose out on the revenue but you also have to pay for storage.
  • Disorganized books: not having an efficient accounting system could mean you’re not tracking income and bills properly to plan for your expenses and collect payments from customers.
  • Bad debts: without a credit control system, many small businesses find themselves incurring bad debts —money owed by customers that can’t be recovered.
  • Out-of-sync credit terms: if you extend a 45-day net term to your customers yet your vendors require you to pay within 30 days, negative cash flow can build up and worsen over time.
  • Poor cash-flow forecasting: if you can’t accurately predict the months during which you may experience a cash deficit, you can’t prepare your business for lean times.

Various factors — including poor forecasting and money management as well as bad debts — can lead to cash flow problems for your business.

Solving Cash-Flow Problems for Small Business

Although no one wants to run into cash-flow issues, it’s not the end of the world if it happens. Here’s how to deal with cash-flow problems in small business:

Use Business Cash Flow Loans

There are many ways to fix cash-flow problems, but some of them may not yield results fast enough to solve pressing issues. Cash flow loans are quick, collateral-free funding ideal for small businesses. The approval process often takes just a few hours and the debt financing options are approved solely based on a company’s past and projected cash flow.

There are different types of cash flow loans, including:

  • Business lines of credit: a “hybrid” between a business credit card and a business loan, it’s an unsecured line of credit with no lump-sum disbursement made at account opening. You only pay interest on the current outstanding balance, instead of the total credit line that’s been extended.
  • Short-term business loans: a type of business capital loan that can provide a company with quick working capital. You’ll receive a lump sum of cash upfront, which is repaid to the lender over a set period of time. Although the interest rate may be higher, the total cost of capital for these loans may be less expensive than longer-term options with a lower interest rate.
  • Invoice financing: a way for businesses to borrow money against the amounts due from customers. You can use this method to finance inventory purchases during a busy season or buy the inventory to fulfill an order before you’re paid for the products.
  • Merchant cash advances (MCA): MCAs give you a cash advance and you’ll repay the advance, plus interest, through part of your daily credit card sales. This method is most suitable for businesses that receive a large portion of payments through credit cards (such as retail).

Different financing options can address your company’s short-term cash-flow problem.

Establish Favorable Credit Terms With Suppliers and Customers

This method is particularly helpful if your cash-flow issue is caused by a discrepancy between how soon you have to pay your vendors and the net term you extend to your customers. For example, renegotiating a supplier contract from payments due on receipt to due in 30 to 90 days means you can hold onto more cash for a longer time.

If you have a good payment history with vendors, it’s often easy to renegotiate payment terms. Even if you have a supplier that already offers a 30-day net term, you can extend it to a 60- or 90-day payment schedule and get some wiggle room.

You can also revisit the terms you’re extending to your customers. For example, instead of a 60-day net term, you can bring it down to 30 days to better match your suppliers’ payment terms and minimize negative cash flow. You can also incentivize customers to pay sooner by offering auto-billing, online payment processing and a discount for early payments.

Get the Books In Order

A good accounting system allows you to track and analyze your finances over time so you can better forecast cash flow and be prepared for slower months. Also, it helps you keep track of receivables, get customers to pay their bills on time, minimize bad debts, and analyze expenses or tax bills so you can trim the fat and tighten up your budget.

In addition, you can improve the billing process to get invoices to your customers faster, avoid costly delays and errors, collect more from overdue invoices and analyze which customers are paying on time. You can use invoicing software, set up automated processes and integrate the tools with your accounting software to improve operational cost efficiency.

Getting your books organized also helps you gain insights into inventory and audit the all-inclusive cost of delivering your products. For example, do you have excess inventory you can reduce? Do your products have sufficient gross margins or do you need to raise your price or lower operating costs? These insights can inform your product selection and pricing strategy to optimize profit margins and minimize cash-flow issues.

Short- and long-term solutions can ensure your business’s health

While small business cash-flow problems are challenging and often unavoidable, there are many ways to navigate the rough patches. By implementing a combination of short-term and long-term solutions — such as using business cash-flow loans to buffer temporary negative cash-flow, auditing inventory, improving the accounting processes and renegotiating contracts — you can minimize the impact of cash-flow problems and improve your long-term financial health, which is the foundation of a sustainable and profitable business.