A healthy cash flow is essential to your company’s operations. A company with positive cash flow has enough cash to pay its debts. When a company’s expenses surpass its revenue, cash flow issues turn into negative cash flow. These challenges can be as small as your company’s performance and decisions and as large as macroeconomic factors such as wars, recessions, and natural disasters. They threaten enterprises globally.
Minimize your company’s risks by learning to prevent and control possible cash flow problems. Let’s examine some typical cash flow issues and how managing cash flow and using good accounting procedures can improve your financial management.
7 Cash Flow Issues (and Solutions) for Small Businesses
Here are the cash flow issues, and below, we have provided solutions for small businesses.
1. Insufficient Cash Reserves
This way, you maintain a cash emergency fund of up to six months of operational expenses that could shield your firm from decreased revenue output. Setting aside so much money in your business bank account may seem daunting, but knowing how much you need might motivate you to increase your savings and cut unnecessary expenses.
Solution
Estimate your sales, determine how soon you will be paid, and calculate all your costs (both fixed and variable) to project your cash flow. This method enables you to plan and set aside cash for unforeseen situations.
Once you know how much you need in your reserves, you can start saving for an emergency fund. Use different ways to automate cash flow estimates to get a better picture of your finances. Split your money into different pools to save for specific goals, like building an emergency fund for your business.
2. High Borrowing Costs
Since funding is considered an expense of the company, if a company cannot afford its funding, debt payments may lead to cash flow problems. Repaying high-interest credit cards and business loans may significantly reduce a company’s revenue.
Solution
Supplier financing can help improve cash flow and lessen debt for firms. You can lower your payments and make borrowing more manageable by consolidating or refinancing loans.
3. Declining Sales or Profit Margins
Underpricing goods and services can lead to low profit margins. Similar issues may occur when sales teams offer discounts that reduce profit margins. However, you can increase profit margins in the short and long term by implementing cost-effective strategies.
Solution
Make a pricing strategy and short-term business survival plan. By examining their costs and pricing, small business owners can decide whether to raise prices or stop offering products or services with thin margins.
4. Uncollected Receivables
Late payments on invoices can lead to cash flow issues for small firms. Outstanding receivables might lock up funds and put your company in a difficult position.
Solution
Review the payment terms and collection procedures to reduce accounts receivable time. Revenue can flow in more quickly if you:
- Forward bills ahead of time.
- Consider your methods of payment and billing plan.
- Break the amount down into weekly or biweekly project-based installments.
- Order older account receivables to pay.
- Request a deposit or partial payment in advance.
- Reward or encourage on-time payments.
- Take a variety of payment options.
- Boost your cash flow using invoice financing.
5. Rapid Business Growth
Cash flow errors are typical in periods of rapid expansion. Shortfalls in cash flow result from overestimating growth or from spending more than working capital. If your business is growing at a very fast pace, it is important that you understand the difference between profit and cash flow.
Solution
Find ways to relax and ensure that organizing your funds is the number one priority. The difficulties increase when you try to define and analyze the key performance indicators of cash flow management if you grow too quickly. If you want to improve your insight about your financial situation, it may be time to introduce new changes to your accounting practices.
6. Excess Inventory or Seasonal Demand Fluctuations
When revenues do not offset investment expenditures, organizations that overinvest in inventory may be headed for doom. Inventory monitoring assists them in avoiding overstock of goods and out-of-stock situations for certain products.
Many industries’ demand varies seasonally. If business leaders fail to consider these changes, unfavorable cash flow scenarios may arise.
Solution
Business owners should think about using an inventory management system to keep their stock balanced. Keeping inventory for a short time helps avoid cash flow problems. Cash flow projections and precise sales forecasting are useful tools for small business owners to prepare for seasonal changes.
7. Poor Forecasting or Record-Keeping Practices
Predicting revenues and controlling cash flows in a company can be easy exercises. However, cash management could get trickier as a company expands. If you are not sure of the exact amount of money you are getting and spending, it will be impossible for you to make a good prediction about what you will most likely need in the future and understand your current situation.
Solution
Think about hiring someone to handle your bookkeeping. It is possible to detect and eliminate errors with the help of a bookkeeping service or professional accountant. Besides, they can look into your previous cash flow and explain the errors you made and how you can make better estimates in the future.
Alternative Cash Flow Solutions
Whether you run a small business with workers or are self-employed, cash flow issues can threaten the viability of your enterprise. Fortunately, these strategies can assist in resolving typical cash flow issues.
Cut and negotiate your costs
A wise approach to ensuring healthy cash flow is managing or cutting costs. When you have more working capital, then you work to control expenditure and do not let cash flow problems escalate.
Specific changes could bring you back to positive cash flow in your particular case.
- Pause nonessential services for now.
- Reduce or stop premium services.
- Grow your virtual services.
- Temporarily use a less expensive supplier.
- Cut operational expenses costs.
While finding ways to cut operating costs is difficult, doing so will highlight both necessary and optional costs.
Develop a short-term survival plan for your business
To ensure the success of your small business, review your operations, revenue, expenses, and business strategy. Examine your company’s profit and loss statements and margins using job costing if you operate on a per-project basis. Determine which items, services, clients, and labor account for the most costs and profits.
Under normal circumstances, knowing this information can help you predict cash flow accurately. It can also assist you in forecasting the impact of reductions on your company.
Explore borrowing options
You can also balance your financial flow by taking out a loan. Ideally, you opened business credit accounts when things were better financially. If that isn’t the case, find out what your present financial service provider can give before looking to other lenders.
Take Control of Your Cash Flow with Cheqly
Cheqly is a neobank that enables enterprises to manage their money in a straightforward manner. You can see the incoming and outgoing funds in real-time, benefit from the budgeting tool, and make quick transactions with virtual debit cards. Access your funds from anywhere through international wire transfers. Our automated reports will save you a lot of time and allow you to view your financial status. Sign up for a Cheqly account today to take control of your cash flow.