Top Cash Flow Problems for Small Businesses (And How to Fix Them)

Written by
Eric Quick — Co-Founder & CEO, PocketCFO

Cash flow: Two words with a loaded meaning for small business owners. 

On paper, cash flow is how money moves in and out of a business. 

In reality, cash flow determines if a business will remain afloat. Cash flow management is essential for small businesses to have enough cash on hand to continue operations, mitigate any unexpected challenges, and improve company financials.

Poor cash flow management can eliminate the balance between the money coming in and out of a business, ultimately decimating revenue (and profit). To ensure your company cash flow remains in the green, you’ll have to identify whatever problems are currently plaguing your financial processes. 

In this post, we’re taking a closer look at six of the biggest cash flow issues for new founders and how you can solve them to improve the financial health of your business.

1. Disorganization 

One of the biggest cash flow problems is poor bookkeeping.  

For instance, a new business that relies on manual spreadsheet data entry rather than automated cash flow management software, like PocketCFO, is highly susceptible to human error. Similarly, a disorganized startup that fails to assign a sole person to handle this data will likely suffer from overlooked and inaccurate data and analysis errors, which significantly impact cash flow accuracy. 

To mitigate these organizational issues, start by switching to cloud accounting software, like Xero or Quickbooks Online. This will allow you to sync all of your business bank accounts and credit cards so you can track revenue and operating expenses and keep tabs on your actual cash inflows and outflows. In addition, assuming your records are up to date, you can also review your income statement (i.e P&L), balance sheet, and cash flow statement in a given time period (ideally monthly!) 

This process ensures cash flow data is widely accessible for financial planning and analysis purposes yet reduces the risk of human error. 

2. Lack of a cash flow forecast

Aside from managing the actual cash flowing in and out of a business, you should also be creating regular forecasts to project cash flow. A cash flow forecast estimates a company's future cash flows based on its current cash position in a given accounting period. 

Without strong cash flow forecasting practices, day-to-day budgeting efforts lack data that can be used to make informed decisions and avoid financial shortfalls like negative cash flow and unaccounted for operating activity, administrative expenses, and other related costs.

For example, a company that’s failed to conduct cash flow forecasting may be interested in making a company investment this month by purchasing new office equipment. With no understanding of the expected cash flow for the upcoming month, this poorly calculated investment can push the company into negative profits and cash flow, even though the actual cash flow at the time of investment was positive. 

With a proper cash flow analysis and financial model, the company could’ve estimated they wouldn’t have had enough positive cash flow on hand and would have waited until later.

To solve this issue in your business, establish a dedicated time to review your financial statements, like your cash flow report, and put together your cash flow forecasts. Then, incorporate all expected incoming and outgoing costs, including all capital expenditures, to calculate a cash estimate for the end of the period.

Note: You should also factor depreciation expenses and other non-cash expenses into all of your cash flow projection as well as financial performance reports. 

3. Overlooking high overhead costs

With many small businesses, overhead costs can quickly accumulate. Unfortunately, overhead costs like team headcount, SaaS subscriptions, and business travel can be easily overlooked during budgeting, ultimately impacting company profit or pushing cash flow into the negative. To avoid putting your business in the red, mandate the proper recording of any overhead costs company-wide. 

For employee-related expenses, using the default receipt functionality in Quickbooks or an app, like Expensify, can make the process of capturing their expense receipts and syncing this data with the company’s financial dashboard easier. 

Likewise, company operators can use such data to identify areas of overspending and implement changes to reduce overhead costs and increase cash flow. 

4. Partial or late payments

Less than 30% of invoices are paid on time — and a whopping 54% of businesses struggle with the late payment of invoices as a result of COVID-19. As one of the largest cash flow management challenges a small business owner can face, partial or late payments can significantly drag on company cash flow and cause delays in overall data recording.

For instance, consider a service-based business, like a plumbing or electrical company. Although the business completed the service work and paid for material costs, they have yet to receive payment from the customer. With labor and material costs already deducted from the company’s cash flow, overdue payment creates a cash flow gap that can't be filled until properly paid.

To avoid partial or late payments that can negatively impact company cash flow, commit to consistent invoicing practices. If possible, request payment or at least a deposit before completing a service. When not possible, send invoices as soon as a job is completed via an invoicing system that can automate payment reminders. Be sure to also provide customers with multiple payment methods to help streamline your payment processes and reduce wait time.

5. Little to no buffer cash on hand

As we’ve recently witnessed with the ongoing impacts of the COVID-19 pandemic, startups of all sorts and sizes can face a variety of unexpected challenges, such as business closures, that can significantly slow company cash flow. With little to no buffer cash on hand, businesses can face steep repercussions that result in a significant loss of money and possibly the entirety of the business. 

As a financial safety net, small businesses need to understand the amount of cash buffer their company should keep on hand. To learn how much of a cash buffer your company currently has, divide the company’s current total cash balance by the daily cash outflow amount. The quotient is the number of days your company can maintain positive cash flow without any incoming cash. 

By understanding the number of days your business can survive on buffer cash alone, you can assess whether it’s enough for current operational conditions or implement budgeting plans to increase the buffer cash amount. To efficiently record and manage buffer data, cash flow management software like PocketCFO can help. 

6. Rapid business growth

Though rapid business growth is great news for a new business, keeping up with the explosive demand can induce cash flow management concerns. As your company makes more money, it’ll also require more money to effectively run the businesses. From new hires to more inventory, overhead costs can quickly spike — and make cash flow management needs a bit overwhelming. 

If your business is encountering rapid growth, implement strong cash flow management processes as soon as possible. Financial management software solutions such as Quickbooks help gather all company finance data, from employee payroll to inventory details, in one place. Easy access to this information eliminates the chance of user error due to lack of data and streamlines budgeting efforts to allow for healthy continued business growth. 

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Operating a small business can be an exciting yet overwhelming process. When faced with cash flow management problems, be sure to follow the above best practices to enhance positive cash flow and overall data accuracy. From the adoption of cash flow management solutions to enhanced invoicing processes, it doesn’t have to be scary to fix your cash flow management concerns. 

Congratulations, you are one step closer to becoming a financial whiz.

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