A cash flow crunch can happen to any small business owner, including you. When an invoice goes unpaid or sales dwindle during the off-season, cash can get tight. Your accounts receivables might report positive numbers. The profit and loss (P&L) statement could even show you’re on a growth trajectory. But those numbers don’t matter if you can’t meet the day-to-day costs of operating the business.
Fortunately, you’re not alone. Small businesses face the cash flow crunch all the time. JP Morgan’s recent analysis of the bank accounts of almost 600,000 small businesses found that they maintain an average daily cash inflow of $381 and a daily outflow of $374. That’s a very small margin.
Research firm CB Insights offers some insights into the issue. Their recent report on cash flow problems focuses primarily on the startup realm. However, the findings hold relevance for traditional small businesses, too.
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At least two of those reasons relate directly to cash flow issues while the others relate more-or-less indirectly. A different study, this one from Statistic Brain, looks more closely at cash flow crunches. The company finds that most small business failures (46 percent) can be attributed to cash flow.
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But statistics only demonstrate the problem. They don’t necessarily describe the other effects of poor cash flow, nor do they provide great assistance in solving it.
But help is to be had. If you’re currently struggling with a cash flow crunch or want to avoid one, read on. You’ll learn about common cash flow problems and solutions here.
What are the Effects of Poor Cash Flow?
Poor cash flow obviously impacts your ability to conduct business. Bills might go unpaid, or — worst-case scenario — the doors might shutter. But cash flow issues can affect your business in other ways, too. Here are a couple of them.
- Unpaid bills. You probably guessed this effect from the moment the question was asked. When your invoices go unpaid, you can’t pay suppliers, your rent (or mortgage), or other vendors.
- Poor credit scores. Paying bills on time improves credit scores. Conversely, the more often you fall behind on your payments, the more your credit score suffers.
- Reputational damage. If word gets out about your lack of cash, it can damage your business’ public image and perhaps your personal reputation as well. Here’s an example: the furniture store with the perpetual closing sale. Selling off inventory is one thing; selling it for months on end hints at a potential inventory or accounts payable problem.
- Limited funding options. A cash flow crunch can also impact your ability to get funding. Traditional and alternative lenders both check business health before approving a company for a loan or merchant cash advance[EF1] .
- Constricted growth. Without cash, the company struggles to grow. Unpaid invoices and other cash flow issues are like weeds. If not taken care of, they choke the business, either limiting its growth or killing it.
What Causes Cash Flow Problems?
Statistic Brain offered some of the leading causes of poor cash flow: a lack of planning, poor credit processing, and a limited knowledge of financing and bookkeeping. Those reasons can lead to a cash flow crunch, but they aren’t the only ones. Plus, some are more acute than others. We separate the causes by acute and indicators, similar to what a doctor would do when attempting to diagnose whether you’ve got a bad break or sprain.
Acute: That is, you need money, stat. You’re bleeding money, in the red, or average somewhere around $7 per day for positive cash flow.
- Bad debt. Unpaid invoices are bad debts. As that debt accumulates, more cash flow is needed to service it leaving you with less and less as time passes.
- Expenses. Exorbitant overhead costs and operating expenses can hurt cash flow. Spending ahead of revenue is a common cause of cash flow crunches for small businesses.
- Impulse purchases. Purchasing discounted inventory or new computers for the team can be beneficial if they are strategic investments. If they’re merely an impulse buy, the company could end up paying for the decision later on.
- Inaccurate pricing. Inaccurate pricing or trying to beat a competitor based on price alone leads to low gross profit margins.These margins impact day-to-day cash flow, company reputation, and opportunities to grow.
- Lackluster sales. A lack of sales will sink the ship.
- Mismanaged inventory. Inventory is another word for cash on the shelf. If too much or too little inventory is on hand, cash flow problems arise. Sadly, you can’t pay your employees with inventory.
- Unexpected expenses. Bad stuff will happen to every small business at some point in time. Not having enough cash on hand to deal with an emergency can turn it from a small challenge into a big cash flow problem.
- Taxes, fines, and fees. Tax payments can be costly, as can fines from organizations like the health department. Such fines and fees can affect not only cash flow but also company reputation.
Indicators: These common causes “indicate” you could be headed toward cash flow problems. You’ll want to take steps to cancel them out so as to avoid a money crunch.
- Defective business model. Cash flow problems often arise when a business isn’t accurately modeled and researched prior to forming it.
- Growing pains. Increased customer demand is good, but overextending resources and capital to meet it can often put a strain on your business bank account.
- Haphazard bookkeeping. Without solid bookkeeping practices, your business might as well be flying blind. If you don’t know where your money is going, you’re much more likely to run into cash flow problems.
- Lack of metrics. Companies succeed when they measure, not when they make decisions based on instinct or an “it’s always been done this way” mentality.
- Limited financial expertise. Some small business owners start their companies with little financial background or without having a financial professional on retainer. This can be a recipe for financial disaster.
- Mismatched payment terms. When customer invoices don’t match up with business bills and expenses, poor cash flow almost always results.
- Poor forecasting. Accurate forecasting is essential for business modeling and pricing. Without it, you could develop cash flow problems.
How Can I Solve My Small Business Cash Flow Problems?
So, your business is in the throes of a cash flow crunch. What are your options? The answer to that question lies in asking the following two questions.
- How bad is your cash flow problem? Are you out of money? Breaking even? Bringing in $10 a day? Or are you deep, deep in the red?
- Do you have visibility into future revenue and cash flow?
Once you answer those questions, you can decide what to do next. If, for example, you aren’t sure what everyday cash flow looks like, you should start with the second suggestion, daily cash-flow statements. If, however, you already use those statements, your next step might be working with vendors to alter a payment schedule or seeking out a merchant cash advance from Sky Bridge Business Funding.
- Merchant cash advance. If you face a small business cash flow emergency, a merchant cash advance might be your best option. This is especially true if you’ve exhausted other credit options or have a low credit score. With a merchant cash advance from Sky Bridge, you can have the cash you need in your bank account in as little as 24 hours.
- Daily cash-flow statements. Profit and loss (P&L) statements typically give you the big picture. To get the small one, look at daily cash-flow reports. It will give you visibility into cash flow and receivables.
- Payment schedule. Setting up a payment schedule, or calendar, helps you a) find trends in sales and inventory and b) stabilize cash flow. With a schedule in hand, you know when money’s coming in and going out.
- Root causes. When you experience a cash flow crunch, you should seek out the root cause. Knowing it helps determine next steps, whether that’s applying for an MCA or trying to negotiate terms with current vendors.
- Term renegotiation. If you can, you should renegotiate terms with either the people who owe you money or the ones to whom you owe money. Updating the terms could help get the two sides of the equation to sync up.
Cash flow problems happen, but you can solve them with the solutions listed here. And, if you’re in a cash flow crunch right now, don’t hesitate to get in touch with the Sky Bridge team. We’re here to help you succeed and grow your small business.