Cash flow is one of the most important financial metrics for a business. It is imperative to the success of a business, and issues with cash flow are among the top reasons why a business fails.
A U.S. Bank study reported that 82% of business failures are due to poor cash management.
Not having a good read on how much money you have and how much money you will have in the near future and distant future is the reason why many businesses lose control and close their doors.
The best way to prevent cash flow issues — and help your business survive and thrive — is by identifying what causes cash flow problems and quickly fixing issues if they arise.
12 Causes of Cash Flow Issues (& How to Fix Them)
If you have any of the following cash flow issues, you need to identify the problem and implement steps to fix them right away.
#1) Not having enough cash in reserve
Relying on the income of each month to pay your expenses is a surefire way to lead to cash flow problems. If one month of revenue is lower than you expected, you could find yourself in a crunch if you don’t have cash reserves to pull from.
Fix It: Build a savings account for your business. Just as you have a rainy day fund for your personal finances, save and build a cash reserve that could cover your business expenses for three to four months.
#2) Overspending and high-overhead
Cash can run out quickly when you have a lot of unnecessary and high expenses for your business.
Fix It: Create a realistic budget that includes the essentials you need for your business. Regularly look at your budget to identify unnecessary costs that you can cut.
Related: 5 Budget Tips for Success
#3) Excess inventory
Inventory is expensive. You have to pay to purchase and store it. Overspending on inventory that isn’t being sold fast enough can lead to cash flow problems.
Fix It: Use your sales numbers to set accurate projections and drive your purchase ordering so you have an appropriate amount of inventory on-hand.
#4) Unexpected expenses
Even with great forecasting, your business may encounter unexpected expenses. From changes in weather to changes in laws to an international pandemic, you can’t plan for everything.
Fix It: Creating a cash reserve will help you get through unexpected expenses and keep cash flowing through unforeseen problems.
#5) Expensive debt
High-interest debt can quickly drain a business bank account.
Fix It: If you have high-interest loans or credit card debt for your business, work with a financial institute to refinance or negotiate new terms to make debt more affordable for your business.
#6) Late or slow-paying invoices
Monthly sales don’t always translate to same-month revenue. Invoices with 30 or 90-day payment terms can mean that your business may not see revenue from a sale for months to come. This delay can lead to less money in the bank and more cash flow issues.
Fix It: Set up terms that encourage customers to pay as soon as possible. For example, you may offer a discount for faster upfront payments.
#7) Delayed payment posting
Even if invoices are paid, money may take some time to hit your account due to delays in payment processing.
Fix It: Review the payment processing tools you use to see if there are options to get money into your account faster. Also, consider opening a small line of credit so you have cash on-hand while waiting for payments to hit your account.
#8) Sales slumps
When sales are lower than expected, a business will have less revenue coming and tighter bank balances.
Fix It: First, identify what may have caused the sales slump. Is it due to a shift in seasonal demand? A change in the market? A shift in your marketing? From there, you can begin to identify what you need to do to either adjust future forecasting or pivot to rebound sales.
#9) Low margins
Even if your sales are high and money is flowing consistently into your account, a business may still experience cash flow issues if their margins are too small and their revenue isn’t enough to cover costs and leave money in the bank.
Fix It: Conduct an analysis on your products and services to ensure that you have assigned the appropriate transaction price you need to keep your business profitable.
#10) Bad forecasting
Strong cash flow relies on strong forecasting. Overestimating sales and underestimating costs will almost always lead to cash flow issues.
Fix It: Don’t run your business without a plan. Set up a 12-month financial plan that takes into consideration your growth plans and potential shifts in the market.
#11) Lack of proper bookkeeping
In order to have proper forecasting, you need to have proper bookkeeping. Not keeping accurate records and not looking at your books can lead you down a road to many of the issues mentioned in this post.
Fix It: Prioritize setting up and keeping good books. If you don’t know what that entails, work with a back office accounting team who can set you up for success.
#12) Rapid growth
While business growth seems like something that is always good, it can cause problems of its own. Growth costs money. As your business grows so do your expenses.
Fix It: Anticipate additional expenses by having an accurate forecasting plan for growth and the cash flow changes that come with it.
Fix Your Cash Flow Issues
There are many circumstances that can lead to cash flow issues. But, thankfully, there are ways to resolve issues so your business can stay in control and on the path to lasting success.
You can prevent cash flow issues by:
- Utilizing cash reserves
- Keeping good books
- Having accurate forecasting
- Obtaining affordable credit lines
- Using metrics to monitor, analyze, and drive your business decisions
If you don’t have financial systems and strategies in place to accomplish these tasks, you may find your business facing cash flow issues.
So, get started today.
Schedule a 15-minute consultation with CFO Solutions to see how we can help you identify the financial metrics you need to monitor in your business to prevent cash flow issues and keep your business running smoothly. Schedule your free call today.
- 12 Causes of Cash Flow Issues & How to Fix Them - June 1, 2021
- What’s a Fractional CFO? Does Your Business Need One? - April 22, 2021
- 3 Things to Consider to Get Your Business Ready for 2021 - October 19, 2020