Decoding Cash Flow Woes for Small Business: Your Most Common Issues and Three Ways to Avoid Them

October 25, 2023 |
Article | 5 min
| Business Insights

Cash flow management is crucial for the success of your small business. By understanding your inflows and outflows and anticipating common cash flow pitfalls, you can leverage best practices and make better-informed, data-driven business decisions.

As a small business owner trying to survive these turbulent economic times, being strategic with your cash flow is essential. When small businesses fail, poor cash flow management is often a contributing factor, if not the primary factor. While it does take time and energy to track the money coming in and out of your business, failing to do so means risking your business entirely.

If you’re struggling with cash flow, you aren’t alone. According to QuickBooks, 60% of small business owners say cash flow has been a problem. Of those, 89% say the problems have negatively impacted their business.

To avoid the negative impact of cash flow woes and position your small business for success, start here: With a solid understanding of small business cash flow, from the basics through actionable solutions to everyday problems.

woman accounting cash flow for small business

The Basics of Your Small Business Cash Flow

Cash flow management is essential to businesses of all sizes, as it reveals the company’s financial health. Positive cash flow means the company brings in more money than it spends. With positive cash flow, you can pay bills, invest in new products or services and give your hard-working employees a raise. A healthy cash flow can also source funding for growth and expansion, as investors like to see that a company can pay off its debt.

Negative cash flow, conversely, is when the company is spending more money than it’s bringing in. A business with negative cash flow will struggle to meet its financial obligations. Those struggles can lead to financial stress and even bankruptcy.

Ultimately, cash flow plays a significant role in the success of any small- to mid-sized business.

Cash flow isn’t just about having enough money to cover expenses. It’s about understanding where that money comes from, how you use it, and predicting future business needs.

Cash flow statements are one way to track this information over time. These statements show how much money was received and spent each month, enabling you to identify trends and plan for future growth or changes.

small business owner drinking tea

When planning for the future of your small business, you should consider both short- and long-term cash flow needs.

Short-term needs are typically day-to-day operations, such as paying employees or buying inventory. Long-term needs may involve investing in new equipment or expanding into new markets. An accurate picture of your current cash flow will help you plan for these investments to grow your business without running into financial trouble.

Understanding Common Cash Flow Problems

Many small business owners will face similar cash flow problems, including:

Lacking an Emergency Fund

Maintaining an emergency fund is smart for businesses of all sizes, as it provides a cushion for unexpected expenses and revenue changes. But for small businesses in particular, emergency funds can mean the difference between staying open or shutting down for good.

business woman looking at lack of an emergency fund

Businesses should plan ahead when creating an emergency fund and set aside a certain amount each month or quarter. Ideally, you’ll have three to six months of operating expenses to cover you during tough times. When your cash flow is positive, it’s easier to siphon money into your emergency fund (and easier to avoid tapping into it). Positive cash flow may give you a sense of false security that you don’t really need an emergency fund, but growing one when you’re able can help save your business when the economy fluctuates downward.

Price Instability from Inflation

A survey by SCORE shows 30% of business owners reported feeling “extremely worried” about inflation, ranking it among their top three business concerns. Another 62% indicated they were keeping their eyes on rising prices.

Inflation hurts every supply line stage and can drastically affect your small business if you don’t properly manage your cash flow.

When inflation causes the price of raw materials to increase, businesses must pass those costs to the consumer to maintain profitability. If the price increases too much, their customers will slow their buying habits. Demand will drop, and cash flow will stagnate.

To combat inflation, small business owners may consider buying raw materials in bulk ahead of time to lock in lower prices. However, this can also lead to cash flow problems, as you may not have enough money to cover future expenses.

business owner price forecasting cash flow

There’s a divide among policymakers on whether current inflation levels are transitory or if they’ll persist long-term. Some look at accelerated wage growth as a driving force behind price increases, even in sectors that initially escaped the impact of higher prices.

Misjudging Startup and Overhead Costs

Misjudging startup and overhead costs can negatively affect business cash flow. If you don’t correctly assess the expenses associated with launching and operating the business, you may not have enough to cover the necessary costs.

Even worse, you may fall short of your financial commitments in the early stages. This can hurt your ability to obtain loans, credit, better rates, and business-friendly payment terms.

Some startup expenses that often go overlooked include:

  • Business insurance: There are several business insurance policies you can purchase. Audit your business risk before deciding which policies you need and which would be unnecessary.
  • Software fees: Think of all the software you’ll need to run your business, from accounting and customer relationship management (CRM) to point of sale (POS) and e-commerce. All come with licensing fees that can quickly eat into your cash flow.
  • Professional help: You can’t do everything on your own. You’ll likely need to hire an accountant, attorney, financial advisor, and IT team to keep your business running smoothly.

Sluggish Receivables Collection

Accounts receivable is the money your customers owe through outstanding invoices. You can consider this cash flow for your small business since it’s money the company can expect to receive in the future.

woman checking her sluggish receivables

However, sluggish receivables collection can harm cash flow. For instance, delayed or missed customer payments can prevent you from paying your bills. Poor receivables practices can also damage your business’s credit and reputation making it more challenging and costly to secure financing in the future.

The average American business has about 24% of revenue trapped in overdue invoices. Outstanding funds create a cash flow bottleneck, preventing you from investing money in new equipment and hires.

Weak collections processes can also lead to:

  • Overdue invoices and missed follow-ups
  • Writing off outstanding invoices as bad debt
  • Billing and payment errors

Corking Small Business Cash Flow Issues

Fortunately, cash flow issues don’t have to mean the collapse of your small business. There are several measures you can employ today to remain proactive against potential problems. Training your eye to notice them is the first step. When you first notice a cash flow problem, pinpoint the cause and follow its branches through your business. Do you have a poor receivables collection process? Are you spending more than you’re bringing in? Are sales declining? Diagnosing the root of the issue will help you determine how to solve it.

Remember, everyone goes through cash flow problems. That means you don’t have to start from scratch when you’re trying to fix them. Here are three best practices you can leverage to improve cash flow for your small business:

1. Invigorate Invoicing via Net 30 and Incentives

Most bookkeepers and accounts use Net 30 credit terms when dealing with customers. This means they have 30 days to pay the invoice from the day you send it. For example, if you send an invoice on September 4, the client has until October 3 to pay.

In most cases, “due in 30 days” and “Net 30 terms” are the same. They differ when your Net 30 terms come with incentives, such as offering a discount for paying the invoice before the 30-day mark.

Small business owner viewing financial accounts

Some benefits of offering Net 30 terms include:

  • Broadening Your Customer Base: New customers will appreciate 30-day terms to pay their invoices. Net 30 terms help everyone improve their cash flow. They know when money is going out, and you know when money is coming in.
  • Fostering a Loyal Customer Base: Net 30 terms simplify the payment process. You won’t feel like a tax collector looking for your money; they won’t feel pressured to pay ASAP. When the gears turn smoothly, your customers are less likely to leave.
  • Enabling Early Payment Discounts: Offering small incentives can improve your small business cash flow. For example, you might offer terms like “2/10 Net 30.” That translates to a 2% discount if they pay within ten days. Otherwise, the invoice is due in 30 days.
  • Staying Competitive: Not every business can offer credit terms to their customers. However, with Net 30 terms trending, it’ll be hard to stay competitive if you demand payment upfront.

If you’re uncomfortable waiting 30 days for payment, consider starting with Net 10 or Net 15 terms. Offering credit to customers may seem scary, but it’s a great way to grow your business. It also shows you care about your customers—everyone can use flexibility during economic uncertainty.

2. Establish Minimum Emergency Reserves

As mentioned, a lack of emergency money is among small business owners' biggest cash flow problems. But workplace accidents, natural disasters—even global pandemics—can occur any time, so it’s vital to prepare for the worst.

business man looking at bills

An emergency business fund can help preserve cash flow. It’s a buffer against unexpected events, allowing you to stay on top of bills, invoices, payroll, taxes, rent, and any other business obligations.

So, how can you build an emergency fund? Begin by asking yourself these three questions:

How Much Do I Need?

If you couldn’t open your doors for a month, how much money would you need to keep your business alive? $2,500? $5,000? $10,000? Whatever that figure is, multiply it by three or six (to plan for three to six months of downtime) and make that your goal.

If you’re operating in an area prone to natural disasters (tornadoes, hurricanes, forest fires), ensure you’ve also invested in the proper insurance.

Where Will I Keep It?

You can use your current bank or credit union, just not the same business account. Open a new one, deposit the money, and don’t touch it.

You may also consider moving some money into a low-risk investment account as your emergency fund grows. Just make sure you have enough left in the savings account in case you need it ASAP.

When Should I Deposit?

Establish a schedule for depositing money into the emergency fund. It could be weekly, monthly, quarterly—whatever works best for your business. Remember, the emergency fund is here to maintain your small business cash flow in the future, not interrupt it right now.

3. Consider Cash Flow Forecasting

As the years go by, you’ll compile data sets crucial to predicting future cash flow. Cash flow forecasting helps you predict your business’s inflows and outflows over a set period.

Owner forecasting cash flow

You know when your busy season starts and ends, making it easier to plan for possible cash flow shortages. From there, you can make more informed business decisions regarding your available and future financial resources.

Cash flow forecasting can help your small business estimate future cash balances. Think of it in the short-, mid-, and long-term.

  • Short-term cash flow forecasting looks at the next 30–60 days. If you’re operating on Net 30 terms with your customers, you can earmark when that money is coming in, where it’ll go, and what you can do with the profit.
  • Mid-term cash flow forecasting will run through the end of the fiscal year or operate on a rolling 12-month cycle. You might be able to adjust your year-end goals if you’re expecting more cash. Or, you may have to tighten up if the market drops off.
  • Long-term cash flow forecasting looks beyond the 12-month cycle. However, these forecasts are usually full of assumptions. They get less accurate the further out you go.

Regular cash flow forecasting is good for your small business, whether you’re doing well or going through a slow period.

For example, if your forecasts predict a cash-positive period, you may move forward with new investments or expansions. If your forecasts predict a cash-negative period, you might have to tighten up expenditures to ensure you meet obligations like payroll and invoices first.

Manage Your Cash Flow with a Sound Partner

Cash flow management is crucial for your small business. Leveraging these best practices will uncover your inflows and outflows. With the data in hand, you can make better-informed business decisions.

Managing your cash flow may become more challenging as your business grows, but Bank of Blue Valley, a division of HTLF Bank can assist you with navigating emerging trends and the cash flow.

Get in touch with Bank of Blue Valley, a division of HTLF Bank to speak to a commercial banker with deep industry insight. They’ll walk you through various products designed to help small business owners with their cash flow needs.