Common Cash Flow Problems for Business Owners and How to Stay Ahead

Running a small business can feel like a juggling act. You have to balance marketing, sales, operations, and finances all at once. But one crucial aspect that businesses often overlook is cash flow management. Cash flow problems can be one of the biggest setbacks for small businesses, even leading to bankruptcy. In this guide, we'll explore why cash flow problems arise and what steps small business owners can take to stay ahead of them.

What is Cash Flow, and Why is it Important?

As a small business owner, it is essential to understand your cash flow. Cash flow refers to the amount of money you have coming in and going out of your business. It is important to know your cash flow as it can help you make informed decisions about how to allocate your funds and manage your expenses effectively. It can also assist in identifying areas where money may be tied up, such as overdue payments from clients or inventory not moving quickly enough.

By having a clear picture of your cash flow, you will be better equipped to make sound financial decisions that will help your business grow and thrive. Regularly monitoring and managing your cash flow can ensure your business stays afloat during challenging times and can make the difference between success and failure.

Common Cash Flow Problems for Small Business Owners

One of the most common obstacles small business owners face when starting out is consistent cash flow. Sometimes sales take longer than expected to pick up, unexpected expenditures arise, or you simply underestimate how much money you need to keep your business running. Let's take a look at some of the most common cash flow problems:

1. Inconsistent Sales

One of the most common reasons small businesses face cash flow problems is inconsistent sales. If a business relies on a few big customers or a single product, it can quickly experience financial strain if those customers or products fall through. To avoid this, businesses should prioritize diversifying their customer base and product offerings.

Related Reading: 6 Ways to Attract New Customers for Your Small Business

2. Slow-Paying Customers

Another notorious culprit for small business cash flow problems is slow-paying customers, especially in the B2B space, where payment terms can stretch for 30, 60, or even 90 days. Keeping cash flow consistent requires a proactive approach. Businesses can be more efficient by tracking accounts receivable, adding late fees, or using invoice factoring to get paid quickly.

3. Overspending

It may seem obvious, but overspending can also contribute to small business cash flow problems, leading to a lack of funds for necessary expenses or emergencies. To mitigate spending and keep cash flow steady, business owners should prioritize expense management by setting budgets, limiting capital purchases, and negotiating better deals with vendors.

4. Ignoring the Bigger Picture

Sometimes small business owners get stuck in the weeds of day-to-day operations and lose sight of the big picture. This can be dangerous when it comes to cash flow management. Failure to track overall performance and consider long-term objectives can increase the risk of short-term cash flow issues and harm a business's growth potential. To avoid this, try using a business dashboard that tracks key financial metrics and long-term goals. Sometimes this reporting can be built out using your accounting software system.

5. Unexpected Expenses

Another common cause of cash flow problems is unexpected expenses. Even the most well-planned businesses can be caught off guard by an unexpected expense, such as a major repair or a lawsuit. These types of expenses can quickly eat into cash reserves, leaving a business struggling to make ends meet.

Fundid Recommendation: For these unexpected expenses, a business line of credit can be a valuable financial tool to help you smooth out your cash flow. With a line of credit, you can access funds when you need them, allowing you to take care of unexpected expenses without having to dip into your savings or disrupt your operations. 

Basic requirements for a line of credit with Lendio:  

• 560+ personal credit score
• $50,000+ annual revenue 
• 6+ months time in business 

See if you qualify today! Not sure what your personal credit score is? Check your credit score for free before you apply for business funding. 

6. Seasonal Fluctuations

Many businesses experience seasonal fluctuations in their sales, which can lead to cash flow problems. For example, a retailer may see a decrease in sales during the summer months when people are on vacation. This decrease in sales can lead to less money coming in, making it difficult to meet financial obligations.

7. Lack of capital

One of the primary reasons that small business owners experience cash flow problems is that they lack the necessary capital to sustain their operations. Capital refers to the funds that a business owner has available to invest in their business. Without sufficient capital, a business may struggle to cover its expenses, make payroll, or expand its operations. Explore the Fundid Capital Marketplace to find your next lending partner!

A Solution to Cash Flow Problems: Stay Ahead with a Plan

Now that we've identified some common causes of cash flow problems for small businesses, it's essential to discuss solutions. One of the most integral steps business owners can take is developing a cash flow plan. This plan should outline a projection of sales, cash inflows, and cash outflows for a given period, usually three to six months. Here are some tips for getting started:

1. Understand Your Cash Flow

The first step to solving cash flow problems is to understand your cash flow. This means understanding where your money is coming from and where it is going. To do this, you will need to track your income and expenses for at least one month. This will give you a good idea of your average monthly cash flow.

2. Identify the Problem

Once you have a good understanding of your cash flow, you can then start to identify the problem areas. This may be that you are spending more money than you are bringing in, or that you have large unexpected expenses. Once you have identified the problem areas, you can start to work on solutions.

3. Create a Budget

Creating a budget is a great way to get a handle on your finances and start to solve your cash flow problems. When creating a budget, be sure to include all of your income and expenses, both fixed and variable. Once you have created a budget, stick to it as closely as possible.

4. Reduce Expenses

One of the best ways to solve cash flow problems is to reduce your expenses. Take a close look at your budget and see where you can cut back on spending. Even small reductions in expenses can make a big difference in your cash flow.  

5. Increase Income

If reducing expenses is not enough to solve your cash flow problems, you may need to increase your income. There are a few different ways to do this, such as working overtime or getting a second job. Another option is to start a side business that can bring in additional income. 

By using a cash flow plan, businesses can anticipate shortfalls and proactively address them before they become major financial problems.

Related Reading: Tips for Increasing Your Small Business Cash Flow

Manage Your Finances Effectively with Tips From Fundid

No one anticipates cash flow problems, but they're a fact of life for small business owners. The good news is that many cash flow problems can be avoided or lessened with some preventative measures. By diversifying offerings, managing expenses, and being proactive about payments and cash flow planning, businesses can achieve financial stability and avoid some of the common cash flow traps. Consistent cash flow management can also open up new opportunities for growth and success. Subscribe to our newsletter to get the latest business growth tips and funding resources.