7 Cash Flow Problems and Solutions

April 21, 2021

How To's

We review the top cash flow problems and solutions that small business face constantly
As a small business owner, you cannot run out of money. That is a golden rule.
Your business could be earning a large amount of revenue, but if your cash is tied up in inventory or your customers are not paying you timely, you will run the risk of running out of cash
It’s a common sighting that cash flow problems are a primary reason why small businesses fail.
With this in mind, monitoring your cash flow regularly is important
Here are the common 7 cash flow problems and solutions.

What is Cash Flow?

Cash Flow is the money coming into your business (positive cash flow) and money going out of your business when you pay bills (negative cash flow)
This is the actual CASH that is available to run your business.
As an entrepreneur, it is very important to keep an eye on your cash flow. This is the lifeline of your business.
Here is a list of the common cash flow problems and how you can resolve them.

Cash Flow Problems and Solutions

1. Late Payments.

This is one of the biggest challenges small businesses face.
Nearly two-thirds of small businesses have a late invoice at any given time
Because of their size, most small businesses cannot absorb the costs of late payments because of the negative cash flow impact
Small businesses that struggle with cash flow are less likely to invest back in their business, therefore, impacting the growth
Without positive cash flow, paying suppliers becomes difficult or impossible
How to Resolve:

Get Paid upfront for your products or services
Offer discounts for early payments as well as payments in full – 2% is always a good incentive
Set up creative and easy payment processes such as PayPal, Venmo, or credit cards
Check a smaller business’ credit report for delinquent payment history
Pull the plug on the business relationship with late-paying customers.

2. Low Cash Reserves or Non at all.

This cash is a safety net for your business
This cash saved is used to cover costs that are unexpected
Most times, this cash is used for short term needs in order to avoid using credit cards or taking out a business loan
Experts recommend having a cash reserve anywhere for 3 – 6 months to cover operating expenses
So, how much cash reserves do you need?
To calculate, subtract expenses from the total revenue to get the amount of money that went toward business expenses. Then, divide this amount by the number of months in the accounting period to determine the monthly cash burn rate. You can then multiply the monthly cash burn rate by 3 – 6 months to come up with the cash reserves needed for your business.
How to Resolve:

Use the calculation above to calculate the cash reserves needed for your business
Budget and project cash flows for your business
Monitor your cash flows diligently
If you are in a crunch, consider a Microloan from the Small Business Administration (SBA). These loans are provided to small companies that need money to grow or pay bills
Eliminate unnecessary expenses so that you can save more
Manage inventory levels especially the slow-moving items that are tying up your cash for a long time.

3. Pricing

Many business owners do not review their pricing from year to year
Chances are that you set your prices in the early stages of your business and desperate for clients
Selling products and services at prices that are too low will result in low-profit margins
As your business is growing, so does your overhead and if you are not adjusting your prices accordingly, you could suffer from negative cash flow
How to Resolve:

Keep your prices competitive.
You can set different prices for your customers. For example ‘introductory’ rates for new customers
Invoice quickly and accurately.

4. Lack of Profitability or Expecting Profitability too quickly

Profits are a major source of cash flow
Without profitability, you will not have enough cash to pay your expenses
Only 40% of businesses are profitable. 30% will break even and another 30% will lose money
It takes time to build a profitable business and according to experts, over a third of business will not reach this milestone
How to Resolve:

Revisit your marketing strategies. Test them to make sure they are still working
Incentivize your staff to help achieve the target set
Upsell and cross-sell. If you have customers that are fans of your products or services, find ways to sell different products or services to the same customers
Be on the lookout for profit-making opportunities

5. High Overhead Cost

These are the expenses that are not directly related to the production of your product or service
Examples include Rent, Office Supplies, Utilities, etc
If unchecked, these expenses can get too high and sometimes out of control
How to Resolve:

Go through your income statement and question every expense. Decide if cuts can be made in order to be as efficient as possible
Negotiate with vendors for better terms and pricing
Switch to cheaper options especially if the quality remains unaffected

6. Taxes

If your business is profitable (making more than its losing), then you’ll owe taxes
Setting cash aside for taxes due is necessary. You don’t want to get surprised by a tax bill and no cash to pay it
Most likely, you will need to pay self-employment tax and your income tax, which you and your business will pay the IRS on a quarterly basis
If you have employees, you will need to pay employment tax (payroll tax)
In addition to the above Federal taxes, and depending on the nature of your business, you may also have to pay Sales Tax, Property Tax, Excise Tax, etc
Setting cash aside for these tax obligations is of utmost importance if you want to maintain a healthy cash flow balance
How to Resolve:

A solid rule of thumb is to save between 30-40% of what you earn to cover both federal and state taxes
If your business is new, every time you receive a payment from a client, you can put 30% of it into a business savings account.
Stay on top of tax deadlines
Delegate tax-prep and filing to a tax pro if you are not an expert

7. Ignoring your financial statements

Good accounting is not enough if you don’t review your financials often and take action
Do not be like many business owners who ignore their books until they are having cash flow problems
If you fail to create a cash flow budget beforehand, you are likely to suffer from negative cash flow
How to Resolve:

Review your financial statements regularly
Create a cash flow budget to determine how much cash reserves the business will need in the coming months
Plan out your cash flows into the future to ensure that your business is on track
If you are experiencing cash flow difficulties regularly, get expert help to assist with your overall financial strategy