Why Do Small Businesses Struggle with Cash Flow?

small business cash flow problem

What are company cash flow problems?

Cash flow problems occur when a business struggles to pay its debts as they become due. A healthy cash flow means that a business has enough income to meet its outgoing expenses, whereas a negative cash flow implies the opposite. Cash flow problems can stem from a variety of issues such as low profit margins, high overheads, poor debt management, or seasonal fluctuations.

Why do small businesses struggle with cash flow?

Small businesses often struggle with cash flow due to several reasons. Some of the most common ones include lack of proper financial planning, unexpected expenses, overestimating sales, and underestimating costs. Additionally, they may also face late payments from customers which can cause a delay in their ability to pay their own expenses. Part of these challenges come from the risks that entrepreneurs naturally take.

According to a study by U.S. Bank, up to 82% of small businesses fail due to poor cash flow management or poor understanding of cash flow. This signifies the crucial role of cash flow management in the survival and success of a small business.

In the following sections, we will illustrate the 10 most common small business cash flow problems and provide practical solutions to address each one. Our aim is to provide insights that can help you steer your business towards healthier cash flow management.

1. Underestimated startup costs


  • Comprehensive research: One of the biggest mistakes when starting a business is underestimating the costs involved. To avoid this pitfall, it is crucial to conduct detailed research to understand all potential costs. These include direct costs such as inventory, equipment, and rent, but also indirect costs like licenses, insurance, and marketing expenses. Learn more about startup financial planning.
  • Buffer in budgeting: Even with the most detailed planning, unforeseen expenses are likely to arise. Therefore, it’s a prudent approach to overestimate costs slightly. This conservative estimate can act as a buffer, helping you manage unexpected costs without disturbing your cash flow significantly.
  • Emergency fund: No matter how well you plan, emergencies are inevitable. Having a reserve fund is crucial for the financial health of a startup. Even if it starts as a small amount, consistently adding to this fund can save your business during difficult times.
  • Regular cost review: Once your business is operational, regularly compare your actual costs against your projected costs. This will help you understand your spending better and allow you to adjust your future budgets accordingly.

Recommended reading: How to Calculate Startup Costs with Examples

2. Slow payments from customers


  • Transparent payment terms: Clear and transparent communication of payment terms is crucial in maintaining good cash flow. Ensure your customers are aware of when payments are due and the consequences of late payments.
  • Incentivize early payments: Encourage your customers to pay their invoices early by offering incentives like discounts or other benefits. This not only improves your cash flow but can also enhance customer relationships.
  • Automated billing and payment reminders: Use an automated system for invoicing and payment reminders to ensure prompt billing. Such systems can send out reminders before the due date and follow-up reminders if the payment is overdue.
  • Credit control: Before offering credit to a customer, it’s important to assess their ability to pay. Conduct credit checks, especially for new customers, to minimize the risk of late payments.

Debtor days tell us how long a company usually waits to get paid after a sale. You can learn more about it in this easy-to-understand guide about debtor days.

3. High overheads


  • Periodic expense review: Regular review of your business expenses can help identify any unnecessary or bloated costs. This should be a routine part of your financial management.
  • Cost reduction strategy: Once potential areas for cost reduction have been identified, implement changes to lower these costs. This could involve negotiating with suppliers for better prices, reducing energy usage, or automating certain tasks to save time and money.
  • Balance cost and quality: While it’s important to control overheads, compromising on the quality of your product or service is not advisable. Striking the right balance is key to maintaining a healthy business.

4. No reserve funds


  • Regular savings: Businesses, like individuals, should practice the habit of regular saving. Allocate a certain percentage of your profits to go into a reserve fund. Over time, this practice can help build a substantial reserve that can be a lifeline during financial downturns.
  • Fund discipline: It’s important to have strict rules for when reserve funds can be accessed. Treating this fund as an emergency-only option will ensure it’s there when you truly need it.
  • Continual fund building: A reserve fund isn’t a one-time effort; it should be continually built and managed. As your business grows, consider increasing the amount you add to the fund to ensure it keeps pace with your business’s scale.

5. High debt expenses


  • Prudent borrowing: Debt can be a useful tool for business growth, but excessive debt is dangerous. Only borrow what you need and what you are confident of repaying. Always understand the terms and conditions of your loans.
  • Refinancing options: If you are struggling with high-cost loans, consider refinancing options. This involves taking a new loan with more favorable terms—like lower interest rates or longer repayment periods—to pay off existing debts.
  • Debt consolidation: If you’re managing multiple loans, debt consolidation can be a practical option. This means taking out a single loan to pay off all existing debts, simplifying your finances and potentially reducing the overall cost of debt.

6. Excess stock


  • Inventory management: Efficient inventory management is key to avoiding overstocking. Using inventory management software can help you track inventory levels and restock based on actual demand.
  • Just-in-time inventory: A just-in-time (JIT) inventory system is where new stock is ordered only when it’s needed. It requires precise forecasting and supplier reliability but can significantly reduce the capital tied up in excess stock.
  • Regular inventory checks: Regular inventory audits can help you identify and rectify overstocking issues. They can also highlight any patterns or trends in sales, helping with future inventory planning.

7. Overlooked bookkeeping and financial records


  • Accurate record keeping: Maintaining accurate financial records is the backbone of a successful business. It allows you to track your income and expenses, making it easier to understand the financial health of your business and plan for the future.
  • Professional help: Managing financial records can be complex and time-consuming. Consider hiring a professional accountant or bookkeeper to manage these tasks. They can help spot potential issues early and ensure you’re meeting all tax obligations.
  • Utilization of financial management software: Using a cash flow tool like Brixx, which specializes in financial forecasting and cash flow management, can simplify your tasks. Check out its features to see how it can help improve your business’s financial planning.

cashflow problem

8. Excessive bad debts


  • Strict credit control: To prevent bad debts, implement strict credit control measures. This could involve insisting on upfront payments, especially for high-risk customers, or limiting the amount of credit you offer.
  • Credit checks: Before offering credit to any customer, it’s advisable to conduct a credit check. This helps assess their financial stability and likelihood of paying their debts on time.
  • Debt recovery plan: In the unfortunate event that you have to deal with bad debts, have a clear debt recovery plan in place. This could involve a dedicated debt recovery team or hiring a collection agency if the debt is large.

9. Decreasing sales or profit margins


  • Regular sales strategy review: Sales strategies should be dynamic, not static. Regularly review your strategies and adjust based on what’s working and what’s not.
  • Diversify marketing efforts: Exploring new marketing channels can help increase sales and profits. This could involve online marketing, social media promotion, email marketing or even traditional marketing methods.
  • Profit margin analysis: Keep a close eye on your profit margins. If they’re shrinking, investigate the cause. It could be due to rising costs, pricing issues or changes in the market.

Recommended reading: Key Profitability Ratios for your Business

10. Seasonal fluctuations in demand


  • Business seasonality planning: If your business experiences seasonality, like a clothing business that sees increased sales during certain seasons, it’s vital to have proper financial planning and forecasting. During peak seasons, make sure you save more to sustain your operations during off-peak periods.
  • Alternate income sources: If seasonality affects your business significantly, consider alternative income sources. This could involve offering new products or services that are in demand during your off-peak seasons.
  • Demand forecasting: Use past sales data to predict future demand. This can help you prepare for seasonal fluctuations more effectively, allowing you to adjust your stock levels, staffing and marketing efforts accordingly.

Recommended reading: 8 Actions to Help Fix Off-season Cash Flow Woes in Business

small business cash flow problem

Take control of your cash flow with Brixx

Managing small business cash flow can be challenging but understanding common issues can help overcome these obstacles. Using tools like Brixx for financial forecasting and cash flow management empowers you to control your financial health, fostering business growth. Remember, the journey towards successful cash flow management is a continuous one, so keep learning, adapting, and striving for improvement.

Don’t forget you can try Brixx today with a 7-day free trial – no credit card required! Embrace this risk-free opportunity to enhance your financial management and steer your business towards success.

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