Top 10 small business cash flow problems solved

Top 10 small business cash flow problems solved

Kim Mercado
By Kim Mercado
Mar 14, 2022
8 min read

Running a small business is tough, and cash flow problems are one of the most common challenges small business owners face. It’s tricky to balance the money flowing into and out of your business.

But it’s crucial for your long-term success. Understanding these common cash flow problem examples and how to solve these challenges can keep your company afloat.

1. Not enough cash reserves

How much cash you need on hand depends on your industry. But you might be short on cash reserves if you’re opening a new business or recently made a large investment or purchase. 

Tips to solve it: 

  • Build up a cash buffer for your business
  • Look for ways to cut back expenses, even temporarily
  • Set up a cash flow management spreadsheet to monitor cash reserves
  • Renegotiate payment due dates to vendors and from customers

2. No plan to manage cash flow

You must track, budget, plan and forecast to know exactly where your business stands financially. If not? With inaccurate forecasting or bookkeeping practices, you could run out of money without even knowing it.

Cash flow problems cause 82% of small businesses to fail, according to SCORE Association. Knowing how to manage cash flow is crucial to keep your business up and running. Think about this: Cash flow can suffer if you have costly equipment repairs or a natural disaster that impacts your sales.

Tips to solve it: 

  • Work with a business accountant to anticipate and plan for financial challenges
  • Predict ups and downs by setting up and maintaining a statement of cash flow
  • Implement a system to track monthly expenses and forecast future expenses for the months ahead
  • Invest in bookkeeping software to automate financial tracking and reduce human error
  • Start now to optimize your tax filings for next year’s taxes

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3. Growing too fast

Business is booming, and you’re celebrating your success. But there is such a thing as growing too fast. Cash flow, for instance, can suffer without proper checks and balances in place as you expand.

Consider this cash flow problem example: If your business grows quickly, so could your overhead expenses like outsourcing, hiring employees, upgrading tech tools or buying more inventory upfront. This can cause your expenses to outpace your income and upset your cash flow. 

Tips to solve it: 

  • Wait to hire until you need to
  • Hire one person at a time, especially at first
  • Consider a business line of credit to cover growing pains that cause gaps in cash flow

4. Overspending

You know what they say, “You need to spend money to make money.” But sometimes spending can get out of hand. If your cash flow has taken a hit, look at your spending patterns. Is there too much going out of your business?

Your biggest expenses can have the most impact, so look for ways to reduce or eliminate them. Don’t overlook small expenses, either — even small leaks can sink a ship.

Tips to solve it: 

  • Use financial software or a spreadsheet to monitor and categorize outgoing expenses
  • Look for ways to cut out or reduce the highest costs first
  • Save money by automating repetitive tasks instead of paying someone to do them
  • Set up a reward system to reach business goals and financial milestones before making different investments
  • Negotiate with vendors on discounts, bulk buys or other bundling to reduce costs

5. Expensive borrowing

Sometimes small businesses need financing for working capital, buying machinery, or hiring more staff. But business loans or credit cards with high interest rates can eat up a company’s revenues and temporarily mask cash flow problems.

Tips to solve it: 

  • Refinance existing debt to get a lower payment or secure a lower interest rate
  • Consolidate business debt to make it more manageable
  • Talk to a small business financial advisor and choose your small business financing carefully

6. Getting pricing wrong

Pricing reflects everything you do in your business. It requires research to get it right. Set them too low, and you’ll have low profit margins — and low profit margins cut into cash flow.

Don’t overlook your vendors’ pricing, either. Prices can vary, and you might find a vendor that can offer you the same thing for less.

Tips to solve it: 

  • Create a well-developed pricing strategy
  • Review prices every 9 to 12 months
  • Evaluate vendors and consider lower-cost alternatives

7. Delayed payment processing

Getting paid is one thing. Accessing the money is another. Thanks to electronic payment processing, small business owners often see a delay between when the customer makes a payment and when it’s made available to access.

There’s not much you can do about this small business cash flow problem. The delay is part of how banks are set up. Still, you must stabilize your cash flow to maintain day-to-day business operations.

Tips to solve it: 

  • Let your customers know you accept cash payments
  • Offer a discount or free upgrade to customers who pay with cash
  • Set up a lockbox for customers to deposit payments by check after business hours

8. Late payments from customers

Slow-paying customers can wreak havoc on a business. When customers pay late, you are out the profit and whatever you spent to do the job.

If you’re struggling with this, you’re not alone. Three out of every five invoices are paid late, according to Export-Import Bank of the United States

Tips to solve it: 

  • Clarify payment terms and expectations on every invoice
  • Ask for a deposit or full payment upfront
  • Send invoices quickly and accept multiple payment options
  • Offer “paid in full” discounts or savings for early payments
  • Send automatic payment reminders for late invoices
  • Charge a fee for late payments

9. Sales challenges

It’s no secret that slow sales can cause cash flow problems. Whether it’s seasonal changes, market fluctuations, the weather (if your business relies on foot traffic) or a break in your lead nurturing process, sales challenges come in many forms.

Tips to solve it: 

  • Investigate the reason behind the decline in sales and implement solutions
  • Online businesses can check site statistics with Google Analytics for sales slowdowns and issues
  • Companies with a business location might implement a referral program to drive sales
  • Invest in a marketing strategy that includes social media or SEO content to increase brand awareness

10. Too much inventory

Inventory is one of the biggest and most crucial assets for business owners in retail or who sell physical products. But it’s also a significant expense and source of cash flow problems. You don’t want your money wrapped up in inventory — it costs money to store your stock.

Tips to solve it: 

  • Focus on better sales forecasting
  • Implement inventory management software and a point-of-sale system for automatic inventory tracking
  • Don’t order more than you need

How NEXT Insurance helps small business owners

Cash flow is the lifeblood of any business. Without the right balance, your business finances can suffer. That’s why small business owners must manage their revenue and expenses and review them regularly.

One area that’s often overlooked is the cost of small business insurance. You want the right protections in place, but you shouldn’t pay for more than you need. NEXT Insurance can help you strike the right balance of affordable, tailored coverage.

Get a customized business insurance plan completely online. And if you have questions? Our live U.S.-based insurance experts are standing by.

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