6 common small business cash flow problems and how to solve them

In this 6-minute read:

  • What is cash flow and why is it often an issue for small businesses?
  • 6 common cash flow issues and how to solve them:

Many businesses don’t make it past the first couple of years due to cash flow problems. Whether they are spending more than they are bringing in or simply can’t keep up with payments, it becomes a real problem for business owners everywhere. 

If your business is having cash flow problems, it may be wise to hire a financial consultant or CPA to help you analyze the situation. We’ll also give you some recommendations for solving common cash flow problems that businesses face. 

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What is cash flow?

Cash flow is the term that refers to how the money moves in and out of your business. (And the term “cash” here doesn’t necessarily refer to hard currency or paper bills… it just means “funds.”) It isn’t just about profits, but all aspects of the funds that come in and how that money gets spent. 

If you are coming up short on payments for necessary business obligations, can’t afford to grow with customer demands, or find that you’re spending more money than you’re bringing in, you have a cash flow problem. 

6 common cash flow problems small business face and how to solve them

It’s good to address cash flow problems as soon as possible so you can take adequate steps to solve them and keep your business running smoothly. Take a look at these common problems and determine if your business needs to work on them. 

  1. Overestimating future profits

  2. Unpaid invoices from clients/customers

  3. Unorganized books

  4. Spending too much

  5. Scaling too quickly

  6. Not maintaining cash reserves

Let’s go over each and discuss ways to address them.

1. Overestimating future profits

Many business owners are overly optimistic about their business and how much they are going to make, especially when starting out. While optimism is a healthy trait to have, too much of it can hurt your business. 

Overestimating future profits can hurt your cash flow in numerous ways. You may make justifications for spending too soon or purchasing too much inventory because you are anticipating a good sales month. It’s important to maintain realistic expectations, and even underestimate so you don’t find yourself in trouble later on. 

How to solve it:

Keep yourself from overestimating future profits by using a solid method for sales forecasting. Use your history of sales to set expectations for each month, or if your business is relatively new, use real data from other businesses in your industry, and be realistic about how much of that share your new business is likely to get.

Not sure how to do this on your own? Talk to a financial professional to get assistance in creating an accurate sales forecast. You should have a somewhat clear idea about sales forecasting if you did proper research before starting your own business.

2. Unpaid invoices from clients/customers

Perhaps the largest cash flow issue for most businesses is clients that haven’t paid their invoices. Lack of payment means less money for your business. 

This can happen for a number of reasons: your client is having similar cash flow problems, they spent too much and suddenly can’t afford the service, they forget about the invoice, or maybe they simply don’t want to pay. 

It’s important to keep track of and address unpaid invoices right away so they don’t become a large problem for you later on. 

How to solve it:

There are a few ways you can resolve your unpaid invoice problems with customers:

  • Require a deposit up front
  • Send out regular reminders when invoices go out (email and text reminders with a link to a payment option are great)
  • Hire a debt collector to assist with problematic clients (unfortunately many people don’t pay on time unless they are threatened with “collections”)
  • Consider using an invoice factoring company

3. Unorganized books

Staying organized is a huge factor in keeping good cash flow and knowing where your money is. Unorganized bookkeeping can and will hurt your company if it continues for too long. 

Unorganized books can result in late fees for invoices you owe, missing client payments that you haven’t received, unexpected costs, and more. It’s important to keep your finances organized from the start so these issues don’t build up and become a real problem.

How to solve it:

If you are not an organized person or you are too busy to keep organized records of your finances, consider hiring a bookkeeper to help you out. A bookkeeper can help you keep good records of your incoming and outgoing cash flow so issues can be addressed early and nipped in the bud. 

4. Spending too much

Spending more money than you have coming the simplest definition of a cash flow problem. If you don’t have the money coming into your business, you shouldn’t be spending it. 

Of course, in most cases you do have to “spend money to make money,” so you need to find that balance and anticipate costs that are necessary so you can make good decisions about when it’s okay to spend money even if you don’t necessarily have incoming cash flow yet. 

High overhead expenses can become a huge problem here if you don’t have enough incoming cash flow because these are generally expenses that you have no matter what, like rent, utilities, phone and internet bills, and more. 

How to solve it:

The best way to address this issue is to cut costs where possible and limit your spending. Here are a few ways you can do that:

  • Audit your expenses to determine what you can cut. This may bring light to unnecessary payments or subscriptions that you have
  • Get quotes from different companies for your phone and internet. Find more competitive rates
  • Automate tasks that you generally hire people to do 
  • Go paperless with your invoicing and record keeping
  • Get lean on office supplies, luxuries in your business space, “expensed” meals, and wherever else makes sense 

5. Scaling too quickly

Trying to grow your business at a too-rapid pace can hurt you in the long run. If you don’t have the incoming cash flow to support your growth, your business is likely to fail if you’re not smart about scaling. 

Think about this example: you land a huge client that will bring in a large payment and ongoing future business, but you need extra help to finish their project, which will still take six months. You hire three people to help with the project, but after the first month you don’t have enough money to keep up with their paychecks. Now you’re in trouble.

How to solve it:

Be smart about scaling. Only take on projects and clients that you have the current cash flow to produce results. 

If you are faced with an opportunity to scale more quickly, consider taking out a business loan to help you address the cash flow issues that may arise. 

6. Not maintaining cash reserves

Every business should have an adequate amount of savings in store to address unexpected cash flow issues. Disasters occur, clients leave, and unprecedented events (like, say, a global pandemic) take place that we never could have predicted. 

In these circumstances, the amount of cash reserves you have can make or break your business. Even with adequate sales forecasting, we can’t always predict the future. So, it’s important to make sure you have something to fall back on when unexpected events take place. 

How to solve it:

It always a good idea to keep at least two months of operating expenses saved up so that even if you do have a slow sales month or disaster strikes, you are able to make payments to keep the lights on and pay your employees. 

If the problem persists beyond your reserves, you may consider pulling out a business loan and looking at ways to gain more business. 

You may also like: Who to pay first when you’re low on cash?

Need working capital now? There’s still time to apply for a PPP loan, but hurry! The extended deadline for application is August 8, 2020

In light of the COVID-19 pandemic, many businesses across the globe are facing some of the cash flow problems we’ve discussed. Under the CARES act, U.S. small businesses can apply for emergency loans to help with this. 

If you haven’t applied for your PPP loan and you determine it’s right for you, there is still time. Talk to your lender and get your application submitted ASAP.

Sign up for your Womply Free account and we’ll keep you updated on new funding opportunities. Customer relationships thrive when local businesses and consumers are connected through Womply data and technology.

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