How To Deal With Cash Flow Problems In Small Business

Business is all about money. As any small business consultant will tell you, you need to maintain a positive cash flow to keep a healthy business that can pay bills. After all, small businesses are especially liable to cash flow problems.

Unfortunately, it's easy to fall into a massive cash flow problem after the slightest oversight, which is why so many businesses hire financing experts to prevent disaster.

Even if your business cash flow has been doing well for a while, you should still watch your cash flow forecast and learn to manage cash flow effectively, especially as a small business owner. Otherwise you'd be risking your livelihood.

But in case disaster strikes, do you know how to deal with cash flow problems in small business? That's what we'll guide you through in this article, so follow along for more useful tips and information.

What Is Cash Flow?

what is cash flow

As its name suggests, cash flow is an indicator of how much cash goes in and out of the company. More specifically, cash flow is the net between inflows (money coming in) minus outflows (spendings).

A positive cash flow is a sign of a profitable business. But when outflows exceed inflows, then it's losing money.

For small businesses, the most critical factors that affect cash flow are the accounts receivable from sales. If a company doesn't have paying customers, it won't survive.

To clarify some common confusion about cash flow, it's not the same as revenue or profits.

Revenue is the total amount of money coming into the business without factoring in spending or other expenses.

On the other hand, profit is the money left at the end of a fiscal period (month or year) after covering all business expenses.

What Are Cash Flow Problems?

What Are Cash Flow Problems

Cash flow problems emerge when the business doesn't have enough cash (specifically, liquid cash) to pay off its expenses and liabilities.

Having a negative net cash flow for a brief period doesn't necessarily mean the business is struggling financially. Sometimes, a company has to make a large purchase or investment, which overshadows its profits. Other companies like summer resorts experience seasonal fluctuations, which can be deceptive of the company's actual state.

But when poor cash flow continues over an extended period, it's a sign of the company losing money.

How To Solve And Overcome Cash Flow Challenges

Now for the main course of the article: the solutions to cash flow issues.

As there are many causes of cash flow problems, some of which could be unique to your situation, we can't cover every possibility. But we'll talk about the most common ways to resolve financial problems. Handling cash flow problems in small business can drastically increase the businesses likelihood of survival.

Encourage Early Payments For Products And Services

Early Payments

Small business owners should always encourage their customers to pay faster, especially if they experience cash flow challenges. Also, an early payment can improve your finances and give you more options throughout the month.

And we know no one likes to send invoices. So you'll also be saving yourself and your employees a lot of hassle that usually goes into invoice factoring, waiting for clients to pay the invoices, and dealing with late payments.

If you have clients that pay you a fixed amount monthly, you can set up auto-billing so that the amount is consistently paid for the exact pricing.

You could also let clients choose their payment day. Not everyone gets paid on the first day or even the first week of the month, so some might prefer to pay on a day of their choosing. So when you give your clients this alternative, you incentivize them to pay on time.

Lastly, you could offer discounts or other incentives to early-paying customers, especially long-term ones.

Set Up Electronic Payment Systems And Invoices

Paper cash is old-fashioned nowadays since digital and online payments are more convenient for most clients.

Accept credit cards in your store since it encourages customers to buy and can speed up payments. But make sure the credit card fees are worth it for your business.

You should also accept online payments. Clients find it easier to pay with their credit card from home than at the store. So encourage them by giving them that option.

Take A Short-Term Loan

Short-Term Loan

Short-term loans for working capital are easy to dismiss because of their higher APR. However, they can be a helpful lifeline to balance out your cash flow statements during a rough patch since they're easy to get approval for and can be paid out as quickly as one day.

Besides, they can be a cheaper option than long-term loans against your bank account with a lower APR because of their shorter length.

Remember that a sudden cash inflow won't magically solve financial problems. You'll still need to work, and borrowing money should be a helpful tool rather than a solution.

That's why we recommend you establish a solid plan before taking a business loan, though, since otherwise, you'd only be delaying your problems instead of solving them.

Also, read the terms of your loan before finalizing it to make sure you're OK with all the caveats. One of the ways how to tackle small business cash flow problems can be with outside financing.

How To Avoid A Cash Flow Problem

Now that your numbers are solid again, it's time to explore some money management techniques to avoid complications in the future.

Create A Financial Budget For Your Company

Setting a budget is a standard solution to financial problems in many aspects of life, not just business. It's a good way of tracking your expenses and staying within a reasonable spending limit compared to income. The benefits of having cash flow forecasting might be helpful.

Calculate how much cash goes into your business and try to set a monthly budget that doesn't exceed it. Then, as your day-to-day business operations go, add your accounts payable to a spreadsheet that tracks how much you spend compared to the budget.

And if you run a seasonal business, you can set an annual or seasonal budget for up to six months. Also, try to save money earned in high-traffic months and allocate it to low-traffic ones.

Furthermore, a budget can give you an idea of which months to expect more cash and which might have a deficit. You can also estimate how much money you need to survive the year, which is essential when making certain decisions. With a solid budget you won't find yourself asking how to fix financial challenges in small business.

Reconsider Overhead Costs And Expenses

Overhead Costs

High overhead costs related to rentals, bills, payroll, tax, manufacturing costs, service subscription, and extra equipment, are always an annoying part of running a business. And while you'll always have to pay them, you need to be mindful of the options you choose.

You don't always need the fanciest office or the most luxurious cars for your operating activities. Instead, consider the costs you can compromise and eliminate anything unnecessary. Otherwise, you'll be fighting a long battle with them, which could end your business growth.

Keep An Eye On Your Cash Reserve

Many business operations require liquid cash to complete, and if you don't have enough in your reserve, you'll fall into bad debts. And if you neglect it for too long, this debt can snowball and have catastrophic events for your business.

So make sure you always have enough liquid cash on the ready if you need to pay some little daily costs or wages.

How to deal with cash flow problems in small business is all about monitoring your banking accounts.

Famous Companies With Cash Flow Issues

famous businesses with cashflow issues

No one is safe from cash flow issues, even giant corporations. Just ask Nike, who suffered an almost business-ending financial problem in the 70s as suppliers pressured the company.

On the positive side, this shows that facing financial challenges isn't the end of the world, and you can still recover from it and become a successful business in the market.

However, these difficulties still need proper management. Otherwise, your company might end up like RadioShack, the renowned electronics store that went out of business after failing to keep up with technology, trying to expand too much, and a few other factors.

Frequently Asked Questions

Why Do Small Businesses Struggle With Cash Flow?

Common financial problems include:

  • Low-profit margins.
  • Failing to invoice clients on time.
  • Challenges with collecting payments.
  • Poor inventory management.

You're also likely to fall for shortages if you don't forecast your cash flow. This often leads to sudden crashes or even failure.rtages if you don't forecast your cash flow. This often leads to sudden crashes or even business failure.

How Can Small Businesses Improve Cash Flow?

How Can Small Businesses Improve Cash Flow

There are many ways for businesses to increase revenue, such as leasing instead of buying, offering consumers incentives like discounts, checking credit scores, buying in bulk to cut down costs, improving inventory management, and if things are desperate, increasing your prices for products and services.

You'll also have to study your financial stability on a regular basis and keep an eye on cash flow projections to avoid difficulties.

Final Words

This has been our tried-and-tested advice on how to deal with cash flow problems in small business. It's important to be familiar with these solutions because financial issues can easily lead to the end of your small business.

Also, learning to handle fund or revenue problems isn't enough. You should also learn how to avoid these challenges in the future, or you might fall into financial difficulties again.

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