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Having Cash Flow Problems in Your Small Business? Here’s How to Fix Them

Learn what’s commonly responsible for cash flow problems in small businesses and how to improve your cash flow.

 Reading Time: 5 minutes

Cash flow problems occur when a business’s cash outflows are greater than its cash inflows.

According to Exploding Topics, cash flow problems and other financial issues are responsible for 16% of startup failures.

So, cash flow problems are responsible for sinking a large number of small businesses. But they also stand between countless other small businesses and prosperity.

Below, you’ll learn about seven sources of cash flow problems and how to fix them.

7 Sources of Cash Flow Problems

1. Slowly Collecting Payments from Customers

Getting paid slowly by customers is one of the biggest sources of cash flow issues for small business owners. This is because revenue represents a large percentage of cash inflows for most small businesses.

If your small business is highly profitable, but you have to pay the bills before you receive payments from customers each month, you may struggle to stay afloat.

2. Quickly Paying Suppliers

Ah… the inverse of the first problem.

By quickly paying suppliers, cash quickly exits your small business. 

3. Poor Inventory Management

Having the right amount of inventory is critical for retailers.

Too little inventory? You might not have popular products in stock on a regular basis, which may result in your customers turning to competitors.

Too much inventory? You’re unnecessarily tying up cash – cash that can be deployed in other ways.

4. Lack of Forecasting

Accurately predicting your cash flow – to the penny – over the next 12 months is unrealistic.

With that in mind, you may decide not to forecast your cash flow. But this makes it difficult to make major decisions.

For example, you’re considering purchasing a new company vehicle. You don’t have enough cash in your bank account, so you would have to finance the purchase. Without a forecast, you would be unsure about your ability to make the monthly car payments.

5. Decreasing Revenue

There are several possible reasons for decreasing revenue that fit into three categories:

  • Company specific
  • Industry specific
  • Macroeconomic

As mentioned earlier, revenue is usually responsible for a large percentage of cash inflows for small businesses. This means a decrease in revenue – for whatever reason – is likely to lead to cash flow problems for a small business.

6. Low Profit Margins

You can have rapidly growing revenue, but if your margins are subpar, your operating cash flow is likely to be on the lower end.

A poor pricing strategy and high costs are two culprits.

7. High Borrowing Costs

Financing key assets might allow you to start a new era of growth at your small business. And if you don’t have enough cash on hand, it may be your only option.

But high borrowing costs can lead to cash flow problems. A few hundred basis points may seem inconsequential, but it really adds up. 

How to Solve Your Small Business’s Cash Flow Problems: 7 Fixes

1. Project Your Future Cash Flow

The common objection to projecting future cash flow is, “I don’t know what it’s going to be.”

But here’s the thing:

You don’t need to be 100% accurate for cash flow projections to be useful.

Let’s say you project an average of $20,000 a month of operating cash flow over the next 12 months with small month-to-month fluctuations. You end up averaging a steady $18,500 over that period.

There are two takeaways from the above:

  1. Something is better than nothing. Without any projection, you might struggle to manage your small business’s finances.
  2. You should err on the side of caution. If you expect an average of $20,000 a month of operating cash flow over the next 12 months, planning to re-invest / pay yourself a salary that works out to less than 100% of that projection may be a good idea.

2. Get Paid Faster and Make Payments Slower

Speeding up cash inflows and slowing down cash outflows are two excellent ways to improve your cash flow.

Review your payment terms with customers, and see if it’s possible to get paid sooner. Consider what’s normal in your industry – if it’s normal to bill 100% upfront, but you’re billing 100% after services are rendered, there’s a good chance your customers are willing to pay sooner.

Next, review your payment terms with suppliers, and see if it’s possible to lengthen the terms. Your likelihood of success partially depends on your importance to the supplier’s business – but in any case, it’s worth a shot.

Further Reading: How to Collect Payments On Time for Your Small Business.

3. Improve Inventory Management 

To effectively manage inventory levels, you need to be aware of what’s in stock and your best-performing (and worst-performing) products. With a POS system, it’s a lot easier to determine what’s happening.

The data allows you to find a balance, and have enough – but not too much – of each item in stock.

4. Target New Customer Segments

As a small business, there’s a good chance you are solving the specific needs of a small group of customers. And that’s a good thing, a way to compete with larger businesses.

But there may be other customer segments you could effectively target – with few, if any alterations to your core products/services. This could allow you to significantly increase your sales, improving your cash flow.

Identifying these segments might require a lot of market research – but the payoff is potentially massive.

5. Reduce Expenses

Slashing expenses reduces cash outflows, which can alleviate cash flow problems.

Here are a few possible ways to reduce expenses:

  • Reduce office space: do a lot of your employees work from home? If so, you may be able to reduce your office space when your current lease ends.
  • Negotiate better prices with suppliers: earlier, we suggested asking suppliers to lengthen payment terms. Negotiating better prices with suppliers is another way to improve your cash flow.
  • Review subscriptions: as a small business owner, you may have a lot of subscriptions – and you may not be using all of them. Keep a spreadsheet with the name of each subscription and the price, and regularly review the list – cancel whatever you aren’t using.

6. Use Business Credit Cards

By using business credit cards, you can increase your cash inflows and slow down your cash outflows.

Cashback or rewards points can really add up – and make a difference for your small business.

And a business credit card can give you several weeks between buying from suppliers and settling outstanding balances.

7. Keep Cash in the Bank

It’s possible to do a great job managing your small business and still have a period of cash outflows exceeding cash inflows. A rough economy or industry downturn might cause this to happen.

Maintaining a solid cash position protects you during tough times. A cash buffer of three to six months’ worth of operating expenses is sufficient for many small businesses, but your exact needs vary depending on industry and projected spending.

Get a Cash Injection with Gravity Capital

By following the advice in this article, you can solve a wide range of cash flow problems.

But what if you need cash now and don’t have time to implement the advice in this article?

In that case, consider using Gravity Capital – our funding solution allows small business owners to solve cash flow problems with affordable and flexible short-term financing.

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