Every business at some point has fallen in this common trap: cash flow problems.
However, you have to handle them before they run out of control thus safeguarding your business from collapsing. And what would be better than knowing the issues that could arise so you can fix them before they even happen? Here you have a complete list of the most common cash flow problems business owners face, along with their solutions. Before you start, you should also make sure you understand the difference between cash flow and profit.
The most common cash flow problems and how to solve them
Many businesses don’t have constant revenue across the year. They might experience high sales in certain months while they barely survive during others. There could also be sudden expenses or late payments that lead to cash flows problems.
It is prudent to understand the cash flow issues that your business is experiencing. Here’s why it helps you find the right solution.
Here are some typical cash flow problems and their solutions:
1. New businesses that don’t have enough income to pay their bills
It is common for start-up businesses to incur losses for the first year or a couple of years. The funds needed to buy additional equipment, payroll, rent, advertising or used in production will exceed the money from sales. In simple terms: there’s more cash going out than cash coming in. Therefore, there is no money to take advantage of a growth opportunity.
Money injection into the business is an ideal solution for a company experiencing such cash flow difficulties. A business owner can access extra money needed from lenders in the form of small business loans, once they have been in operations enough time to fulfill the loan requirements. Most lenders will require 2 years in operations, but some alternative lenders like Camino Financial only require 9 months. Other sources of finances can be from family, personal savings, line of credit or friends, among others. You can find here a complete list of capital resources and alternatives to a business loan.
2. Businesses that don’t receive payment until the job/project is done
Not receiving payments until the project is done reduces cash inflows. You will be spending money to pay employees, buy material, pay rent, transport or on other miscellaneous items and because there is no money coming in, it can be a real struggle to meet some of these obligations. Builders, as well as construction companies, are some of the most common types of businesses that face this kind of situation.
You can get a line of credit so that you can have money in your account to pay your bills or employees and pay back when you get paid for the project. Another option to getting cash is getting a loan that can help you sort your financial obligation before you get paid by the clients. Are you in the construction business? As we said above, this industry often suffers from cash flow shortage due to payment delays. If that’s your case, make sure to read How to increase cash flow in your construction business.
Or you could try talking to your clients and setting different payment terms, maybe they can give you an advance when you start working and the rest upon completion. Find here the clues you need to set fair payment terms for your clients.
3. High overhead expenses
Expenses such as telephone bills, rent or utility are known as overhead expenses. They are not incurred during the creation of a product/service but incurred for the operation of the business. Therefore, high overhead costs relative to business’s revenue will affect cash flow negatively.
You should audit overhead expenses so that you can cut back on costs that are not necessary. This way, your overhead expenses will be low thus not negatively affecting the business cash flow.
4. Bad bookkeeping and financial management
This is one of the most common cash flow problems. Small mistakes in bookkeeping can cause serious financial issues in your business. Bad bookkeeping can affect sales, purchases earnings, payments, and payroll. Also, bad bookkeeping can be unrecorded transactions. Messing with these important business transactions may have an impact on your business cash flows.
Having an accountant, even when you have a small business, can help with financial management and bookkeeping issues. An accountant makes sure that all the transactions are correct and money flows in and out consistently as needed. Each coin that is spent/received will be accounted for. There are many ways an accountant can help your business’s cash flow management.
This is a common problem for re-sellers and manufacturers who have a warehouse that is stocked with one or more different products. It occurs when too much of a product is produced or purchased. The product ends up in the company’s shelves thus, reducing cash inflow.
For manufacturers, the levels of materials kept in the warehouse should match your volume of production, available cash, supplier abilities, and sales forecast.
For re-sellers, only purchase products that you can sell within a short time. It’s better to buy the products again rather than over-buying and then not being able to sell them.
6. Offering too much credit
Offering credit usually encourages customers to increases their spending. Though it is an excellent way to increase profit, too much credit inevitably reduces cash flows. Sadly, it can kill the company if not well-managed.
You should not provide credit to all of your customers in all of their transactions, especially new customers. Before you offer a credit option, you should perform a credit check to make sure that the customer can pay the amount owed. Through a good filing system, you can keep track of debtors so that you follow up the overdue payments and, as well, control your business cash flow. Limiting the credit you offer your clients is only one way to properly manage your accounts receivable. Find here up to 14 more ways to improve your accounts receivable system.
7. Excess debt
If your clients/customers don’t pay for your products or services, you can end up with excess debt. This reduces cash flow and, if that is not bad enough, you’ll also be unable to pay your own bills or cover for the production costs.
Before you extend credit to customers, you should review their credit to know who can pay and who can’t. Provide better terms to clients with good credit. Make sure that customers that don’t have a good track record pay before getting products or services.
8. Seasonal demands
Seasonal businesses depend on seasonal demands; when demands are high, revenues are high too. During the other seasons, the company receives no or little revenues. In this kind of companies, cash flow problems happen during the seasons with low demands.
Creating and utilizing a business budget is key for seasonal businesses with cyclical cash flow. A yearly budget will help you know how much money you’ll require every month to cater for recurring bills. You should save money from the months with high revenues. This way, you can pay for overheads during low revenue months.
Also, monthly cash flow statements help you know your liquidity position so that you can seek additional cash as needed.
9. Bad gross margins
Bad gross margins happen when a business sells its products or services at low prices and, at the end of the month, are left with very small or at times negative profit margins. The situation regularly happens in very competitive industries with strong pricing measures.
Wondering what to do if you are in such an industry? First, audit your services or products so that you know all the costs incurred while providing/producing them. Knowing how much your product or service costs will help you (where possible) to increase its price, especially if there are bad margins.
10. Growing sales with customers who take too long to pay
Late payments are the most significant risk to your cash flows. If there is no money coming from your customers, there will be no money to pay the company’s bills and meet the operating expenses. Therefore, it will be more difficult for you to pay bills if invoices go unpaid for a long period.
Apply good invoice system practices for payments. This can be achieved via the use of electronic payment solution as well as cloud-based software, which offer invoicing instruments that save your time and optimize business cash flow. Also, the tools provide many forms of payment and access to invoice reports and records. Want to know the best part? The collection period will be short.
Don’t let these cash flow problems stop your business
A business must have the cash to operate because cash is the “lifeblood” of a business. Therefore, cash flow management should be given the attention it needs.
You cannot have any cash flow problems in your small business. It doesn’t matter if you have a great business model, are profitable and have great investors, if you have bad cash flow you won’t be able to survive.
Fortunately and as you have seen, there are a number of actions you can implement to solve the most common cash flow problems. Still need more tips? Get them by reading How to increase cash flow in your small business.
Also, remember that a number of cash flow problems are solved by seeking additional capital. Here, in Camino Financial, you can access a suitable business loan for your company in just a few days (usually within 4-10 days). Our requirements are flexible and our terms are reasonable. Apply for a small business loan now and say goodbye to cash flow issues.