Cash flow is like oxygen to a business. It means that if you are able to maintain it correctly, it can help you survive and thrive. But if you have a sluggish approach towards it, it can push your business towards its demise. Unfortunately, we have come across several companies suffering from cash flow problems, making it harder for them to keep a tab on their resources and operate smoothly.
A Fundera report states that 82% of businesses that reach out to them seek short-term loans or lines of credit. A significant chunk of these businesses do so because of improper cash flow management, leading to cash shortage while managing their working capital requirements. So it is imperative for every business, whether small or large, to have a tab on their cash reserve and ensure that it is appropriately managed.
This article discusses nine common cash flow problems and their solutions.
Why are Cash Flow Problems Bad?
Here is why cash flow issues are bad for your business –
- Makes it difficult to pay suppliers timely.
- Increases your difficulty in procuring new inventory, making it difficult for you to conduct business efficiently.
- Late debt repayments can lead to legal repercussions.
- Delay in staff salary payments.
- Loss of potential future sale contracts.
- Inability to procure debts at reasonable costs.
While these can discourage you, you need to understand that you can sort these cash flow problems.
9 Common Cash Flow Problems
A cash flow problem refers to a situation where total debt exceeds the total business revenue in a given period. As a result, it leads to a net negative cash flow into the business, which can have a host of negative repercussions for other business activities.
While causes of cash flow issues can be any, if it continues for an extended timeframe, it can even lead to bankruptcy.
Here are nine common cash flow problems businesses suffer from:
1. Delay in Payments
Late payments are one of the prime cash flow problem examples, especially for small businesses. While having terrific sales numbers is excellent, it is imperative to have your payments completed timely. Unfortunately, 31% of small business owners wait over 30 days on average for payments. If an SME is taking over a month to make payments, it can dwindle suppliers’ confidence in you.
One of the walk around for this is to set payment terms that both the parties can respect and adhere to.
2. Reduced Profitability
Only 4 in 10 businesses are profitable. In contrast, three in 10 enterprises incur losses while three break-even but barely earn. Of course, your business might sustain if it has previous profits to bank upon, but for how long?
3. Inaccurate Cash Flow Forecasting
Inaccurate Cash Flow forecasts is another problem that most businesses face. If you are a startup, most of your cash flow predictions would depend on guesswork, impacting your cash flow situation. However, even if you are an established company with cash flow discrepancies, you will have difficulty judging the future potential and spotting potential problems proactively.
4. Sluggish Inventory Management
Inventory is a critical part of every business. While there is a need to have enough to deal with incoming orders, keeping too much of it can lead to an increased warehousing cost and a higher chance of obsolescence. If you are suffering from cash flow problems, it will also impact the way your inventory is managed.
5. Poor Workforce Management
Most businesses do not have a proper payroll system, and they manage it via means like Tally and Excel. Therefore, managing their payroll is one of their most common cash flow problems. However, consistently missing deadlines can lead to a higher churn rate and ultimately cause your business to sink.
6. Having too much or too little liquid cash
While liquid cash reserve is necessary to meet daily working capital requirements, having an excess can reduce liquidity. In contrast, having too little of it can make it difficult for you to meet your expenses.
7. Delayed Tax Filing
If you are suffering from cash flow problems, then you will run into tax filing issues. While tax filing isn’t directly related to cash flow, if your cash accounting is mismanaged, you cannot ascertain tax liabilities without running into multiple ordeals.
8. Score Creep
“Score creep” is a common phenomenon that refers to a sudden change in project requirements. While it is okay to face them, it is vital to understand how it affects your profit margins. But if you are mismanaging your cash flow statements, there is a high chance of you missing out on negotiations and incurring losses.
9. High Overheads
Overhead costs refer to fixed costs, such as rent, insurance, and administrative expenses. While these are a critical part of your business, you often run into a risk of overdoing them. When you are not keeping a tab on your cash inflows, Cash Outflows and have little understanding of your spending, you often end up over-allocating funds for overheads and ruining your profits.
How do you solve Cash Flow Problems for Your Business?
While cash flow mismanagement can ruin business activities, it is not a difficult task to gain control of it. Here is how you can solve your cash flow troubles –
- Have a periodic budget, say monthly, quarterly, half-yearly, and annually, to help you reveal potential shortfalls and garner additional time to make amends.
- Set up a line of credit to help you meet shortfalls while you try to take control of your cash flows.
- Try to reduce the credit period offered to your customers.
- Ask your suppliers to give you a lengthier credit period to help you settle your cash flow discrepancies.
- Optimize your expenses and cut down on unnecessary ones.
- Look for opportunities to upsell and cross-sell to help improve the cash flow situation.
- Add different payment solutions to push your customers to pay promptly.
- Look for trade discounts and improve your negotiation skills.
- Find ways to optimize your invoicing endeavors.
Learn How Slate helps detect Cash Flow Problems before it’s Too Late
Running into persistent cash flow problems can be a significant roadblock for your business. Even when companies are proactive, there can be times when they run in a spot of bother concerning their finances. Instead of panicking about the situation, there is a need to have a calm head and look for solutions.
One of the best ways to get rid of cash flow troubles is using the Slate integration for your accounting software. The Slate Platform doesn’t replace your existing software but is an addition to those.
Once you integrate it, it gives you actionable insights into your business’ cash flow. It includes a thorough presentation of your incomes and expenses, along with comparisons to help you keep a tab on your cash flows problems and solutions.
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