cash flow problems, cash flow problem, cash flow forecast, negative cash flow, small businesses, poor financial planning, accept online payments, overhead expenses, short term finance

by Sam Franklin | May 26, 2022 | 9 min read

Common cash flow problems for small businesses and how to solve them

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Last updated: May 28, 2022

It’s widely known that cash flow problems are a major hurdle for SMEs and growing enterprises.

Research from Xero and PayPal in the pre-pandemic time of 2019 showed that 37% of small businesses had considered closing in the previous year due to late payments.

A situation that’s all too common.

The reality is that there’s a myriad of reasons why a business might have cash flow issues – it’s up to you to identify these issues and put in place the correct strategy to resolve them.

This article will explain what cash flow problems are, investigate the common causes of cash flow issues, and look at effective ways to deal with them.

What is a cash flow problem?

You have cash flow problems when the cash generated by your business is less than expenditures - cash outflow exceeds the cash inflow. 

Cash flow analysis should be conducted periodically to monitor your business’s financial health. A monthly accounting period is a common timeframe to calculate and track your company’s cash position.

You have a cash flow problem if you consistently have a negative cash flow over many accounting periods. It should be seen as a major red flag, and immediate action must be taken.

Even profitable businesses can suffer from cash flow problems, for instance, a company that issues low quantity but high-value invoices each month. Late payment of just one of these invoices could wreak havoc with its cash flow.

In short, cash flow problems will eat away your working capital, heavily disrupt your business operations, and ultimately lead to insolvency if left unchecked.

Table of contents

Six common cash flow problems and their solutions

Outstanding receivables

Late or slow payments from your customers, aka outstanding receivables, can cause major headaches to small business owners. 

Outstanding receivables are the amount customers owe you for the products or services you delivered to them. You’ve paid your costs yet haven’t received the money from the customer.

This equates to a situation where the outflow is greater than the inflow for the product sold within that accounting period. If most of your sales are paid back slowly, then you’re simply scaling up the problem. This situation will quickly become unsustainable without a large cash reserve and negatively impact your cash flow position.

Outstanding receivables include anything sold on credit or invoices sent, overdue, or partially paid.

The fix: Get paid quickly

Several strategies can be employed to help encourage rapid payment depending on the circumstances:

  • Automate your invoicing – instant invoicing, reduce errors, clearly display due dates, create a database and automatically deal with overdue payments.

  • Auto-billing – automatic billing cycle that draws amounts due from the client's bank account for predictable payments and better cash flow management.

  • Client selected payment dates – incentivise and increase client ability to pay faster.

  • Offer early payment discounts – a small incentive for paying on time to discourage late payments.

  • Accept online payments - hassle-free for the client, receive your funds instantly, and no bounced cheques.

  • Limit credit and client credit checks – limit the number of sales on credit and only extend credit to customers with excellent payment history.

To put it simply - you need to get your invoices out lightning fast, keep on top of your invoices, make payments as easy as possible, and reduce risk by being selective when it comes to credit.

Low profit margins

Whilst profit and cash flow are separate, you're likely to experience cash flow problems down the line if you're not making much profit off your sales.

High costs, selling your products or services for low prices, offering unnecessary discounts, and continuing to sell products with weak profit margins will reduce your total cash inflow.

The fix: Find out why

If your costs are too high, you should seek leaner business practices, reassess supplier relationships and renegotiate your contracts. Keep a close check on your sales team, too – they may be giving away unnecessary discounts in their quest to exceed targets.

How much are you selling your products or services for?

Pricing is indeed a delicate balance, but it’s no dark art. Your starting point should be based on a breakeven analysis to determine at what point you start making a profit and achieve positive cash flow.

Don’t be afraid to experiment with your pricing strategies to find that sweet spot. If you offer a unique product or service and have a great reputation, you may be surprised at how much your customers are willing to pay - your perceived value will support your price point.

Reviewing your pricing and tracking your profit margin over time is important as continual adjustments may be needed due to changes in costs and market trends.

Finally, discontinue products or services with low-profit margins, and explore thedevelopment of a complementary product line or service to be upsold alongside your main product.

Redundant inventory

Investing too heavily in inventory can be an extremely ineffective use of capital. But if you understock, you run the risk of not fulfilling customer orders.

Like many things, it’s a balance.

The fix: Inventory management

There are various methods to keep track of inventory depending on the size and the type of business you run.

Regardless of the exact method - inventory checks should be done systematically and periodically. This will enable you to accurately determine what inventory you have, what you need to buy, what’s selling fast and what’s not.

Depending on the size and nature of your business, an inventory management system that links to your accounting software could be a very wise investment. It will give you real-time information about your stock, prices paid, and how much you need at any given time. 

In short, your aim is to get rid of inventory that’s not selling and focus on keeping a reasonably sized safety stock.

Poor business growth strategy

Cash flow errors are exceptionally common for SMEs’ undergoing high growth phases - unchecked growth increases your future receivables and significantly hikes up current expenses. As expenses rapidly surpass revenue, you’ll quickly run the business into financial problems without capital on hand.

Simply put, biting off more than you can chew without having the right strategy or enough money in reserve could land you in a serious pickle.

The fix: Develop growth and survival strategies

Regular calculation, analysis and forecasting are essential to avoid poor financial planning. A cash flow forecast will help predict the months that might see a cash deficit or surplus - keep it conservative and plan accordingly. You’ll get a good idea of how much cash you might have on hand or how much cash you’ll need.

Although growth is extremely exciting, discipline must be exercised to decline large contracts if your forecasted cash position cannot cope or you don’t have a cash reserve or access to finance.

Overheads and expenses

Overheads and expenses are persistent costs that don’t directly tie into the core of your business operations. 

They include costs for rent, internet, telephone, travel, insurance, accounting fees, building maintenance and cleaning, legal fees, etc.

High overhead costs equal more selling just to break even.

The fix: Audit your finances

Whilst it’s instinctive to be focused on the sale, it’s equally important to save and economise.

Carefully scrutinise your costs and expenses - you should be looking to cut wherever possible. Plan this meticulously and distinguish between essential costs or costs that add value to the business and those that don’t.

Investigate all non-essential costs and see where you can cut back, renegotiate, or get better deals elsewhere.

All overhead expenses add up; even minor adjustments on a grand scale will save you money and result in a noticeable increase in your cash flow without impacting performance.

The key is to be highly analytical about what does and doesn’t add value to your business.

Lack of a cash reserve or access to funding

Unexpected circumstances or rapid scale-up will demand a quickly accessible capital source.

Ideally, all businesses should have a reserve of cash set aside for these types of scenarios. Unfortunately, the reality is that most small businesses just don’t have a large enough cash buffer. If there isn’t an effective source of short-term finance on hand, then core business operations can quickly be impacted during a cash flow crisis.

If you don’t have a reserve or an effective line of funding, you must immediately secure usable cash to prepare for various situations.

The fix: Build a reserve and source effective financing solutions

If you don’t have a cash reserve, it’s time to start building one. It’s common to build a cash reserve that covers about three months of business expenses - create the budget from your current and forecasted expenses to determine the amount needed.

Treat a business savings account like any other savings account. Simply put aside small portions of your revenue each month until you hit your target, and don’t touch it.

When it comes to securing funding, there are many options out there. Be wary of what suits your needs best. Traditional funding options have high-interest rates, long fixed terms, risks associated if you can’t make payments, and can require giving up equity depending on which funding route you choose.

If you have a recurring revenue-based business, there is a new breed of lightning-fast, flexible funding that has evolved from a deep understanding of the needs of eCommerce. 

Often set up by founders, revenue-based financing offers highly flexible, rapid financing based on revenue streams for subscription-based businesses. 

It works by converting a percentage of your client subscriptions into upfront cash. Funding offers are data-driven and optimised by AI to ensure risk is kept very low.

The key advantages are:

  • No need for pitch decks - data-driven.

  • Rapid funding, the best financiers will return an offer in 24h.

  • Pay as you earn. The repayment amount fluctuates in proportion to your monthly sales - you pay after the client has paid you.

  • No interest rates.

  • No dilution.

  • Significantly cheaper than traditional lending methods.

Revenue-based financing is a very modern cash flow solution to recurring revenue business and could be exactly what you need to raise capital fast.

Check out our guide to revenue-based financing to learn more about this funding model.

Written by

Sam Franklin
Sam Franklin

Sam founded his first startup back in 2010 and has since been building startups in the Content Marketing, SEO, eCommerce and SaaS verticals. Sam is a generalist with deep knowledge of lead generation and scaling acquisition and sales.


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