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Cash flow problems arise when a business’s expenses exceed its incoming revenue during a specific period, or when revenues are adequate but cash runs low while awaiting client or customer payments. While these are common occurrences in business, if you’re not prepared for these cycles or if they happen too often, it can be a sign that your business is facing cash flow problems. Understanding and preparing for these financial patterns is an important step in building a successful and resilient business.
Here is a list of common cash flow problems that businesses face. While not every sign may apply to your specific business, recognizing relevant warning signs can help you identify and address potential issues before they are problematic. Below, you’ll find these warning signs along with quick fixes and long-term strategies to get your business back on a solid financial foundation.
Signs of cash flow problems
1. You’re missing payments or using credit cards to pay for things like vendor invoices or business loans.
Are you having trouble paying vendors, utilities, or other regular expenses when they come due or ignoring bills altogether? Or, maybe you’re using credit cards to pay bills that should otherwise be paid from cash on hand. All of these are red flags that your business has serious cash flow problems.
How to spot problems: Look at your accounts payable report (or stack of bills) to see if you’ve been putting off payments (purposely due to a lack of cash). Also, review credit card statements to see if there are recurring and/or regular payments that you’re funding with your cards that should otherwise be paid with cash on hand. Paying with credit cards from time to time may not indicate a problem, but doing so regularly can indicate a cash flow issue.
2. Seasonal ups-and-downs catch you off guard.
Many businesses have cycles and seasons–those times when revenues periodically rise and fall due to weather, holidays, or academic years, for example. If you know your business and industry well, you shouldn’t be surprised by these cyclical fluctuations. If you are caught off guard, then you’re likely going to have cash flow issues that you’re unprepared to manage during your business’s downtime.
If your business experiences a slower cycle due to seasonal changes or other regular fluctuations, but you don’t have cash set aside to cover expenses, you may find yourself putting off payments or using credit cards to keep up.
How to spot problems: Whether you use bookkeeping software like QuickBooks or Xero or simply have access to your bank statements, review your financial records to find revenue ups-and-downs. This will help you understand if there are times in the month or year when your revenue experiences fluctuations. Once you find these, you can create a strategy to help you better prepare for and manage them. For example, you can ask vendors to modify your payment due dates so that bills are paid when revenue is higher and/or when your clients submit payments to you, as applicable.
3. Sales are up but profitability is down.
If you’re selling more but have less cash to show for it, then your pricing strategy is likely off. This often arises when expenses increase but you don’t adjust your sales pricing accordingly. This will erode your cash flow and result in reduced profitability.
How to spot problems: If sales are steady or growing but you still don’t have enough cash on-hand after your bills are paid, your pricing strategy could be the reason.
To help identify if pricing strategy is at the root of your cash flow challenges, determine your break-even point. Then, determine your desired profit margins for each of your products and services, ensuring they are realistic. If you find that your offerings are in demand, but not profitable, you will likely need to raise the prices for these offerings. If you find others that are neither in demand nor profitable, you may want to reduce or eliminate them. This will save you money on inventory and/or staffing that doesn’t boost your bottom line.
4. You’ve lost track of your business’s (growing) expenses.
Often in our personal lives, we add things like streaming services, gym memberships, or other subscriptions that we rarely use, but that become recurring expenses that we have to pay. The same thing happens in business: As businesses grow, they also add services, products, and even staff that may not suit current needs or they stop paying attention to every dollar that comes in and goes out. If you’ve lost track of your business’s expenses, you could be at risk for critical cash flow challenges.
How to spot problems: Review your business’s bank statements, credit card statements, and cash expenditures to find areas that have grown in expense. As you’re reviewing these expenses, analyze whether they contribute to your business’s bottom line. Some may be necessary expenses that don’t produce a profit, but you may find that many expenses aren’t necessary and can be cut.
5. Sales are up, but there’s no cash in the bank
Your sales look healthy, but your bank account tells a different story. Are your sales numbers impressive but your bank account balance isn’t reflecting that success? This disconnect often points to collection issues that can seriously impact your cash flow. When there’s a gap between making a sale and receiving payment, your business can face a cash crunch even during periods of growth.
How to spot problems: Review your accounts receivable aging report to see how long it takes customers to pay you. Look for patterns like consistently late-paying customers or lengthy delays between sale dates and payment receipt dates. Also examine your payment processor statements–some processors hold funds for several days or even weeks before releasing them to your account. Compare your daily sales reports with actual bank deposits to identify any delays.
6. Your business and personal accounts overlap.
When business and personal expenses are mixed, eventually it becomes very hard to identify which expenses belong in each category. That can put you at risk not only of bad bookkeeping habits, but also of potential tax issues. Perhaps worse, when the lines blur between your finances as a person and your business, it makes it hard to qualify for a loan.
How to spot problems: This one is easy to identify: You’ll know right away whether you have separate personal and business bank accounts and credit cards. Mingling funds can create many challenges, including that it makes it much more difficult to spot and address inaccurate or inappropriate expenses from your business account.
Be sure that all of your expenses are paid using trackable processes. This is especially true for your owners’ draw and staff salaries. As an owner, if you’ve been taking money out of the business for personal expenses as needed–without doing so through a check or other type of payment that can be tracked–you may deplete your business’s cash reserves without remembering how or why. The same is true for staff pay, which also needs to be carefully tracked to ensure funds are set aside for payroll taxes.
Quick fixes for cash flow problems
Cash flow problems can quickly snowball into things that will negatively impact your business in the long run, like damaged credit scores, damaged relationships with suppliers, depleted staff morale (especially if you’re not paying them on time), and legal issues. It’s also harder to collect on accounts payable the longer they are outstanding. If you’re on the brink, here are steps to take that can help:
- Talk to existing lenders before you have trouble repaying. If you have a business loan and you anticipate that you’ll have trouble paying it, contact your lender. They may be able to make adjustments to your loan that can help you get your cash flow back on track. By doing this, you keep communication lines open and can come to a proactive solution.
- Meet with an accountant right away. A good accountant can help you set up your business’s finances properly. They’ll also spot areas that are sapping cash, such as inventory that’s out of hand, office space that’s too expensive, or a warehouse that’s too big and costly for your needs. They can help you find ways to grow your revenue, control costs, and be profitable. In addition, they can help you get tax filings in order. The investment you’ll make in professional help can have a significant long-term benefit for your business.
- Seek to modify payment terms with vendors. See if you can work out updated payment terms such as paying a vendor with net 60 day terms, rather than net 30 days, or payment due dates that better align with times of the month or quarter when your revenue is higher. If you offer payment terms to your clients by providing them 30 or 60 days to pay, try to obtain the same terms from your vendors. Most vendors will want to keep you as a customer and, if possible, they’ll find ways to work with your cash flow cycle.
- Separate your business and personal expenses. If you haven’t already opened a separate business bank account, do this right away. Otherwise, it’s impossible to accurately separate your personal expenses from your business expenses—and that can make it harder to spot and eliminate cash flow issues and runaway expenses. Also, pay yourself with the same level of tracking and diligence as you pay other staff. This makes it clear what the business is paying you, rather than treating company funds as personal spending money.
- Find expenses that can be reduced or eliminated. Look for expenses that have gotten away from you or that could be reduced by using technology. For example, switching from expensive print ads to digital ads and email campaigns may save money while achieving marketing goals.
- Look for ways to generate quick revenue to cover immediate needs. If you’re sitting on a lot of post-holiday inventory, for example, figure out how to turn it into cash, whether you offer goods for sale to your customers or propose a bulk sale to another business. If you’re in the personal service industry, consider offering a discounted gift card special. While strategies like these aren’t long-term solutions, they can help you generate much-needed revenue quickly.
Longer-term strategies for successful cash flow management
- Build and keep a cash reserve. Just as having an “emergency fund” is a wise financial strategy for your personal financial health, having cash reserves available for your business can help smooth out cash flow challenges. Although it can be challenging, start small and have a savings goal each week or month—over time, it adds up and puts your business in a healthier financial position. Continue to add to this until you have enough reserves to cover one, three and then six months of ongoing expenses. Continue to save more if possible.
- Regularly review your business’s financials for runaway expenses. Reducing or eliminating these expenses can free up more cash each month. In addition, creating and using realistic financial projections can help you get a better sense of income and outflow, as well as revenue lines that are profitable and expandable and expenses that can be trimmed.
- Calculate your business’s operating cycle. Knowing your operating cycle can help you understand how long it takes to convert inventory into goods and sell them–in other words, how long it takes to turn expenses into cash. Here’s how to calculate your operating cycle:
Days receivable (how long customers take to pay)
+ Days in inventory (how long supplies/products sit before selling)
– Days payable (how long you take to pay vendors)
In general, the shorter the cycle, the better off a business will be because it means that there’s continuous revenue generated without long delays either holding stock or for production. When you know to expect revenue ins, outs, ups and downs, you can better plan your cash flow.
Cash flow problems: A business-breaker that builds over time
Remember this: cash flow issues are an important challenge for small businesses and the leading reason that many close. But for most of these businesses, the problems built over time until they simply became too big to resolve.
Always pay attention to your business’s cash flow and take action when things get tight. The earlier these warning signs are addressed, the more options you’ll have to get your business back on track to financial health.
Talk to Grow America. We can help.
If you’re a current Grow America client and cash flow challenges could prevent you from making regular business loan payments to us, reach out to us today.
Grow America has been lending to small businesses for more than 30 years and we understand the challenges that small businesses face. We’re here to help you navigate challenges while protecting your business’s financial and credit standing and we’ll work together on a solution.