Cash flow indicates whether your business is thriving or not. Sooner or later, all businesses face problems if there isn’t proper cash management. These problems aren’t only prevalent during the recession, in fact, all kinds of businesses face such problems even when business is booming.
Why do cash flow problems occur in the first place?
The answer – there are several variants the cash flow problems depend on. From internal issues to macroeconomic problems, anything can hinder the cash flow in your business.
So, what can you do to save your business?
In this article, we have brought together the major reasons for the cash flow problem and some of the most effective solutions.
Let’s get started.
How Cash Flow Problems Affect Your Business
Before diving into more details, let’s show you an awful sight of what cash flow problems can drag you into.
Once you start receiving late payments, no payments at all, are unable to settle due receivables, you’ll start suffering from negative cash flow issues. This is a bit of a situation because when you run out of capital, running a business is quite impossible.
Here’s what you’ll have to fight while dealing with negative cash flow:
- Being late or missing debt repays
- Supporting business expenses from your account
- Missing improvement opportunities due to investment shortage
- Unable to pay the suppliers on time ruins the trust and relationship
- Customer satisfaction is compromised
- Getting an extra loan to support the business that results in a pile of debts
- Unpaid employees eventually lose the spirit
- Finally, bankruptcy and business closure
To overcome or prevent these terrible conditions, you must have a thorough understanding of the cash flow.
The Reason You’re Facing Cash Flow Problems
Although the reasons may vary depending on different conditions, there are some very common ones that put businesses under a cash crunch. Below are some of them:
1. Lower Profits Or Dull Business Performance
A low-profit margin is undoubtedly one of the major reasons businesses face cash flow problems. Although cash flow and profits aren’t really connected together, any business’s net profit influences the cash flow.
Although you may have a profitable business in the future, that doesn’t guarantee any positive cash flow. This mainly happens because of the accrual basis of accounting. In these cases, your revenues and expenses will be documented as they are incurred, instead of received.
Ensuring you have a persistent profit will help you support the expenses of your business and also help you reinvest in the company. Plus, the extra cash will also help you take care of any loans you have or increase your product range.
If you notice, strong profits alone are generating more cash inflow and improvement compared to the struggling companies with lower profits.
2. Hefty Debts
Debts are a hold-back, no matter the purpose.
If you have heavy debts to repay, the larger the debts grow, the more difficult it will be to keep up with the financing. Whether it’s your credit card with a higher interest rate or loans, both will take a big chunk out of your revenues.
3. Keeping Profit Margins Low
A well-structured pricing policy is crucial for any business.
When you’re offering low-profit margins, you’ll have to provide multiple fold quantities to generate expected profit. The pricing problems arise when you don’t review the expenses thoroughly.
4. Inadequate Cash Reserves
When you don’t have a cash reserve for at least 6 months of expenses, you’re bound to get the cash crunch. According to a survey of 2020 Federal Reserve Banks, 86% of small business owners said that they’d have to take action if they come across a revenue loss of 2 months, and about 17% said that they’d go for business closure. This is all due to insufficient cash reserves.
5. Accepting Excessive Credit Sales
This is another major reason that isn’t addressed too often or too well.
Allowing sales on credit has a negative effect on your cash flow. Because when you’re giving your clients the opportunity to pay with credits, you’re giving them a timeframe of one, two, or more months to clear the due while you have to pay for that product right away.
As much your credit sale increases, you’ll notice the cash flow reversing.
6. Outstanding Receivables
Receiving late payments will increase the chances of negative cash flow in your business. Once your cash is stuck in outstanding receivables, your business will soon be in a very tight cash position. This happens due to lower efforts in reviewing the terms and collection policies for payment.
7. Proper Cash Management Techniques
To keep the cash flowing or increase cash flow, you have to make sure that your cash management strategy is executed thoroughly.
To ensure this you have to be careful about managing your liabilities and assets. There are certain things you have to do and avoid to keep everything on the right track. Like following up on the late payments, making on-time payments to the suppliers / employees, etc.
8. High Business growth
During the high business growth phases, you might easily be confused and fail to recognize the cash flow and profits. This is due to the over-forecasting growth.
9. Over-Investing in Inventory
If you invest an excessive amount in your inventory, you’ll end up having troubles in your business. You’ll face problems like overstocking and even running out of stock of main products which will eventually lead to cash flow disturbance.
10. Leaving The Cash Flow Statement Unused
When you don’t use the cash flow statement, you’ll miss out on the date of your payments and this will decrease your chances of investing a certain amount at the right moment.
If you keep leaving the cash flow statement unused, there’s a high chance you won’t know your major profit source and miss out on the opportunity to utilize the source and bring more cash flow.
11. Seasonal Fluctuations in Demand
Once in a while, you might have to deal with seasonal fluctuations in demand. When you can’t cope up with such changes, the situation will worsen and reduce cash flow drastically.
12. Imprecise forecasting or inadequate bookkeeping practices
When you fail to forecast the right cash flow or don’t hire any bookkeeper to manage cash flow, you’ll lose track of the cash flow and things will become more complex to handle.
Mismanagement has the potential to jinx your mind about how much you’re spending or earning.
13. Accepting Partial Payments
Accepting partial payments may be the norm but it is bound to disturb your cash flow eventually when you accept too many partial payments. This is because although the clients are not making the whole payment for the service or product, your business has to pay for it instantly.
Offering this privilege comes with a heavy price as your business will have to make the payments upfront and most of the time, to manage such an amount of money, hefty debt is the only way. As the debts increase, you’ll see your cash flow getting hampered.
The Solution To Cash Flow Problems
To save your business from negative cash flow effects, you must take some measures. Luckily we have some fool-proof tactics to cover you.
Here’s how you can keep the cash flowing.
1. Have A Backup Survival Plan Ready
Just in case you fell into the negative cash flow, you’ll need to pull yourself back up. To do so you’ll need to have a survival plan ready.
To make your survival planning easier, there are some things you need to have sorted out. Have a detailed breakdown of your income, business plans, operations, procedures, expenses, major profit and expense sources, etc. This info will help you get an accurate cash flow projection that you can use to come up with a survival plan.
2. Try The Upsell and Cross-sell Method
Upsell and cross-sell methods are the two classic approaches to keep your clients satisfied and encourage them to buy more products / services without pressuring them.
Besides increasing your sales, you’ll notice a significant change in your cash flow as well.
3. Cut Down on Expenses
You might find reducing expenses challenging and this is where the survival plan’s detailed information will help you identify the necessary and avoidable expenses. Use that direction to get rid of extra expenses.
Remember you don’t necessarily have to make drastic changes. A few well-planned changes will be enough to bring your cash flow back.
4. Allow Credit Card Purchases
To have your cash flowing, you can always choose to get the payments through credit cards. It’s a win-win deal for you considering you won’t have to wait for months for the money and the fact that you will save up a good amount from not sending monthly statements.
The best part of this method is that you’ll be able to increase the cash flow and clear your due payments to suppliers or creditors.
5. Arrange Faster Payments
This might feel like an ordinary step but this is a very effective one. Once you start arranging faster payments, you’ll receive money fast from the clients, which will give your cash flow a boost.
You can take steps like:
- An upfront partial payment
- send invoices early
- Allow different / multiple payment methods
- Ask clients to clear their due amount, etc.
6. Increase Prices
Increasing the prices of the product can be daunting as there are chances of your business facing negative impacts. But letting products / services go on a lower profit margin also harms your business.
So, it’s okay to increase your product line’s cost as long as you can provide a better and improved service. Customers agree to pay the increased amount when they receive more convenient and friendly in-store interaction.
Go ahead and take the leap.
7. Negotiate Or Lower The Payables
Another effective method is to negotiate or cut down on the expenses to bring more positive cash flow. You’ll have to start with your known vendors / suppliers to talk about the suitable terms and payment options in detail. This is to ensure you opt for the right strategy about the payments you make if your cash flow is strained.
To keep your cash flow undisturbed, this will be the right fit where you can also prioritize your expenses and keep cash flow problems in control. You have to be strategic about the payments you make if your cash flow is strained.
8. Keep Borrowing Options
Whether you see cash flow problems coming or not, having borrowing options open will help you big time to maintain the balance of your cash flow. While immediate loans can seem like a life-saver, that’s more like a red flag to stay away from.
In delicate situations like that, to borrow money, you have to ask your financial service provider for the best offer. Get a few things ready after offer discussion, like business plan documents, cash flow forecast, interest rates, terms and conditions, and lastly any mention-worthy business flaw. These details will help you maintain transparency in the deal.
The bottom line is that having a constant cash flow is essential for any business to survive in the long term and the key to this is the right strategy.
Thorough research of what you might face will help you stay away from a lot of paths that can potentially damage your business’s health. Make sure you have proper knowledge of the problems and the solutions as well to keep the cash flow unharmed.