Solving Cash Flow Problems

Woman and man work on accounting for their business

Maintaining positive cash flow can prove essential to the financial health of any small business. When cash flow problems arise, it’s important to know your options to manage them. Seeking out small business funding can help ensure that you have access to capital when you need it the most.

What is cash flow in a business?

The term “cash flow” describes the movement of cash in and out of a business. Positive cash flow means your business has more money coming in than going out; negative cash flow means more is going out than coming in.

Why is cash flow important to a business?

Cash flow is important for businesses because it determines how easily you’re able to meet your current financial obligations and how well you’re able to plan for the future. For example, during stable periods you might set aside some cash into reserves to act as a safety net if an economic slowdown affects your business. Positive cash flow can make handling a temporary crisis easier, such as an unexpected expense or the delayed payment of invoices.

A business with negative cash flow can run into numerous issues, especially if the negative cash flow persists over the long term. Some of the most significant cash flow problems can include:

Falling behind or defaulting on debt obligations
Inability to pay basic operating expenses or cover payroll
Difficulty obtaining access to capital through loans or lines of credit (if you’ve already defaulted on some obligations)
Limited ability to grow your business

In a worst-case scenario, ongoing cash flow problems could trigger the failure of the business. That’s why it’s important to know how to identify and manage minor cash flow issues before they escalate.

What are the most common causes of cash flow problems?

Cash flow problems can affect virtually any type of business, including start-ups and established operations. In terms of the most common drivers of cash flow issues, here are some of the key things to watch for:

Unchecked expenses or expense creep: Failing to keep track of overhead costs could lead to cash flow problems if you’re unknowingly spending more than you’re bringing in. Expense creep occurs when your expense categories stay the same but your spend increases in those categories, which can be a side effect of inflation.
Slow- or late-paying clients: Clients who fail to pay on time can result in cash flow hiccups if you’re counting on the money to arrive by a certain date. If you don’t have a collection process in place, you may spend valuable time and energy chasing down payments.
Changes in demand: Cash flow problems can sometimes plague businesses that experience higher revenues during certain periods of the year due to seasonality. For example, you might see sales peak around the holidays, then slump in January.
Trying to grow too quickly: If business growth outpaces your cash flow, you could rack up deficits and have trouble balancing the books.
Too-low profit margins: Low profit margins result from undercharging for your products and services or carrying too-high expenses. In either case, poor cash flow can be an unintended consequence.

Small businesses can face unique cash flow challenges when trying to establish themselves and grow in the early stages of business. For instance, you might underestimate the costs of launching your business or how quickly it will take for the company to begin turning a profit.

An unexpected event, such as a global pandemic, can also impact your business’s cash flow. Eric Hudson, CEO and founder of Preserve, saw revenues take a hit in 2020 as the COVID-19 pandemic dealt a blow to the food service industry, which made up a large segment of Preserve’s client base at the time. Using a business line of credit, Hudson was able to pivot and continue growing the business with a new focus.

How to solve cash flow problems

Generally, the best way to avoid cash flow problems is to have a plan that might include the following strategies.

Get access to capital using a line of credit

When you have a problem with cash flow, one of the first solutions to consider is a business line of credit. A credit line can act as a stopgap since you can draw against your credit line as needed to cover operating expenses or unexpected costs. For example, you can write checks from your credit line to pay suppliers, make tax payments or cover a surprise equipment repair.

Using a business line of credit means you don’t need to dip into your personal financial resources or stretch your cash flow when unique business opportunities arise. For instance, small business owner Chandra Franklin Womack used her line of credit to acquire a small engineering firm, expand its operations and immediately increase her bookings.

When comparing small business loans and lines of credit, you might want to consider things like:

How much you can borrow
Interest rates and fees
How quickly you can get funding

Create a cash flow budget

Creating a cash flow budget can help you to plan for potential cash flow problems and potential solutions for dealing with them. A cash flow budget is simply a budget for your business’s projected cash flow over a set period of time. You might plan your budget by month, by quarter or year, depending on how far out you’d like to forecast.

Your budget can be integrated into a broader cash flow management system. Some of the key items to consider for cash flow management include:

Monthly expenses
Revenue sources and the seasonality of those revenues
How much your business has in reserves
Inventory management
Invoicing and collection policies
Access to capital and credit
Pricing and profit margins
Short- and long-term business goals

At its core, cash flow management is all about tracking the flow of money in and out of the business. The goal is to optimize cash flow as much as possible so that you’re making the most of the money you have coming in.

Improve the invoicing process

Invoicing can be one of the most tedious aspects of running a small business but it’s not a task you can avoid. Improving your process for invoicing can help to resolve cash flow problems by ensuring that your clients pay on time.

Some of the ways you can encourage faster payments include:

Sending out invoices quicker
Following a regular invoicing schedule
Asking for partial deposits or payments upfront
Offering clients faster, more efficient ways to pay
Sending regular payment reminders
Extending a discount to customers who pay early
Changing your payment terms to include late fees or penalties

While you’re updating your invoicing process, you might consider reviewing individual client contracts.

For example, if you have a client who consistently pays late, you might add language to their contract that requires them to pay additional late fees and penalties. That could give them an incentive to pay on time. You could also reach out to individual clients to ask for input on how you can improve the invoicing process to make it easier for them to pay in a timely manner.

Reduce expenses

Lowering expenses is a relatively simple-sounding way to address cash flow problems in your business. The less your business spends, the more cash flow should improve.

Finding ways to reduce or eliminate spending means going through your expenses carefully to better understand exactly where your money is going. In a sense, it’s not that different from fine-tuning your personal budget.

For example, when reviewing your cash flow budget consider what you’re spending on:

Rent or lease payments
Utilities
Payroll
Inventory
Supplies
Debt service
Taxes
Insurance
Credit card and payment processing fees
Bank fees
Accounting software
Advertising
Shipping
Subscription services
Travel
Employee perks

Next, consider which of those expenses you might be able to cut back or eliminate. For example, you might refinance existing small business loans to get a better rate or lower your monthly payments. Or you might consider changing insurance companies in order to reduce your premiums.

The more creative you can get with cutting expenses, the more money you could add back into your business cash flow.

Automate your cash flow management

After setting up a cash flow budget, one of the best tips for handling cash flow is automating. The more of your business process you can automate, the more time and money you might be able to save. For example, some of the things you can set on autopilot include:

Invoicing
Sending of payment reminders
Bill payments to suppliers or vendors
Processing receivables
Cash flow forecasting

These are things you might be able to do through your bank or accounting software. You can also use cash flow analytics tools to view your business’s entire cash flow picture in one place.

Getting a handle on cash flow

Cash flow problems can impact your ability to keep your business going or plan your next phase of growth. The good news is that managing cash flow doesn’t have to be time-consuming or stressful. By implementing some basic systems and strategies, you can better position your business to avoid or reduce cash flow problems.