Common Cash Flow Problems Facing Small Businesses and How to Solve Them

A good cash flow is one of the most important aspects of building a healthy business. It’s often cited that cash flow problems are a major contributor to failure in small businesses. There’s no denying that it’s important, so plans for your cash flow shouldn’t be an afterthought.

It’s important to avoid and fix cash flow problems when you start your business—starting off on the wrong foot can be difficult to recover from. But even if you’ve been in business for a while, it’s important to also keep an eye on your cash flow position regularly and course correct to avoid any problems that may come up.

What problems do businesses often see? Let’s look at seven cash flow problems and how small businesses can work to solve them.

1. Underestimating Startup Costs

If you’re just starting a business, getting a realistic budget in place (with room for overage) is necessary to help you avoid cash flow problems right from the start. Unrealistic estimates and lack of a cash reserve will get you started on the wrong foot. Think of how challenging it would be to run out of money before you even have a chance to open your doors.

If you’re not sure where to start with estimating startup costs, the Small Business Administration has a worksheet that can help guide you through creating a startup budget.

2. Expecting Profitability Too Quickly

When you open the doors to your business, you probably hope that customers will be lining up waiting to purchase from you. But that may not be the case for your business.

A Kabbage survey found that 84% of small business owners reach profitability within the first four years of their business. And 68% reached profitability within the first year. It can take time to build a profitable business and nearly one-third of businesses won’t hit that milestone in the first year.

If you’re not prepared for this, that can create cash flow issues early on in your business. Setting a realistic time frame to profitability and having enough cash to hold you over until then can help you avoid worrying about your cash flow.

3. Not Creating a Cash Flow Budget

A cash flow budget is an estimate of cash you expect to receive and cash flow you expect to pay during a period of time. This can also be called a cash flow forecast. If you want to create a cash flow budget for the next 30 days, project how much cash you expect to receive and spend in the next 30 days.

This budget can be more useful than a standard budget in the day-to-day running of your business because it will help you get a handle of your cash position at any point in time.

Will you have enough to pay your bills? When do you expect the bulk of your outstanding receivables to come in? A cash flow budget can help you answer those questions and tackle issues before they become big problems.

4. Overlooking High Overhead Costs

If your overhead costs are too high, your small business is going to experience cash flow problems. Costs like high rental costs, expensive car leases and travel can eat into your profits quickly. When you have high overhead costs you’re fighting an uphill battle. You have to sell more just to cover your overhead costs and break even.

Reducing overhead costs can make a long-term difference to the profitability of your business and its cash flow.

5. Collecting Receivables Too Slowly

You may have business success selling, but if your customers are slow to pay you, that can put you in a tough spot. Collecting receivables too slowly can stifle growth and not give you the money you need to continue to move your business forward. Plus, cash flow problems from slow receivables collection can make it difficult to pay your bills on time.

Putting a receivables process in place, and only extending credit to customers who have a history of making prompt and on-time payments can help position you well to avoid cash flow problems from receivables.

6. Growing Too Quickly

Most people want to grow their business, but sometimes growing too quickly can cause cash flow issues that can hurt the business.

For example, say you land a large client contract that is beyond your company’s current capabilities. In order to fulfill this request, you need an extra four members of staff to deliver the project on time.

When it comes to payday, however, you don’t have the cash to cover their wages, as you haven’t received your first payment from the new client. This puts you in a bad cash flow position.

To fix this kind of problem, you could access a line of credit from the bank, such as an overdraft or short-term loan. In many cases, this is a viable option because banks are more willing to lend to a business if they can see a draft service contract or letter of intent.

Once the client pays you, you can pay down your debt. This means that you only have to pay interest to the bank for the amount of time you actually need the cash.

7. Low Profit Margins

Pricing can be an art, but it still starts with knowing your numbers. Your profit margin is an important metric to know when analyzing prices. Your profit margin will tell you how much money your company makes from the money it earns.

A low profit margin indicates that either your costs are too high, your price is too low or both. Without a strong and sustainable profit margin, you’re always going to battle cash flow issues. Reviewing your profit margin and tracking it over time can give you insight into your pricing and cost details so you can see whether something needs to change to help improve your business cash flow.

How to Fix Cash Flow Problems in a Small Business

If you know you have a cash flow problem, it’s time to make changes. These problems won’t just clear up on their own. Some solutions to help you tackle your cash flow problems include:

Create a Cash Flow Budget

A cash flow budget or forecast is an estimate of how much money you expect to see flowing in and out of your business during a specific period of time. By creating this, you’ll be able to see which months you can expect to see a cash deficit, and which months you can expect a surplus. You’ll also be able to get a pretty good idea of how much cash your business is going to require over the next year or so to survive.

A cash flow forecast is also a great resource to help you make important decisions, such as when to make a capital expenditure, or whether or not to cut an expense.

Make It Easier to Get Paid

Invoicing clients—and waiting for those invoices to get paid—can create a cash flow nightmare. For companies with cash flow difficulties, getting paid quickly is important.

If you don’t already make it easy for clients to pay you, it’s time to start. Try an online invoicing solution, like FreshBooks, that makes it easy to send invoices and get paid all online. Not only that, but you can automatically send overdue invoice notices to give clients a little reminder that you expect prompt payment.

Plus, if you have a client that you charge the same amount to monthly, like on a retainer or subscription basis, you can also set up auto-billing to automatically charge their credit card monthly. Find solutions that make it easier to get paid so you can spend less time waiting for the cash to hit your bank account.

Cut Expenses

If you find yourself constantly coming up short when it comes to cash, it might be time to take a hard look at your expenses. Expenses can balloon out of control when you’re not paying attention.

Start by sitting down and looking at all of your fixed expenses. What can be cut? Are there expenses that you can reduce without a large business impact? Find those expenses and see how removing them will affect your cash flow budget.

Have Access to Cash

Even with the most careful planning, there will be times when customers don’t pay and you find yourself in a tight cash flow spot. To avoid panicking, you’ll need a backup plan: either a cash reserve, or access to a loan or line of credit. Borrowing money isn’t meant to solve your regular, ongoing cash flow problems, but it’s good to know it’s there for you to use occasionally when things don’t go as planned.

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This post was updated in June 2020.