Top small business cash flow problems, and how to fix them

Cash flow—the net amount of cash that your business receives and disburses during a period of time—is the lifeblood of a business. Without cash flow, you can’t buy inventory, pay or hire employees, or secure financing.

Unfortunately, many small businesses struggle with cash flow. In fact, many businesses fail in their first year because of poor cash flow management. Luckily, cash flow problems are easy to fix if caught early on.

But how do you know if you have a small business cash flow problem? The answer is simple: if your business spends more than it earns, you have a cash flow problem. To better manage your business’s cash flow, here are 5 mistakes you need to address:

Overestimating sales

Being able to accurately forecast sales allows you to make important decisions, such as when to make a capital expenditure and when to cut an expense. Businesses that overestimate sales often overspend. It’s important that you base your future sales expectations on real numbers and historical evidence.

Impulse spending

Running a business involves a lot of expenses. Business owners who don’t consider the cost-benefit of every single expense end up overspending and decreasing their profit margin. To avoid impulse spending, you need to limit spending to beneficial expenses—costs that benefit your company’s profitability in measurable ways.

Unpaid invoices

Cash is most needed when your business is growing, which makes it all the more important that you collect payment when it’s due. Many small business cash flow problems arise from not enforcing late-payment penalties and collections policies. If a customer doesn’t know that there are consequences to late payments, they may put off paying you.

Low inventory turnover 

Businesses that don’t pay attention to their inventory and reorder points, risk running into a cash flow problem. Pay attention to which inventory moves quickly and which sits too long on the shelves. Stockpiling slow-turning inventory can hurt your small business’s cash flow by locking up your money.

Not having a cash flow budget

It’s normal to experience fluctuations in sales depending on the season. Businesses that encounter problems with cash flow often don’t set a budget to anticipate huge jumps or drops in sales. It’s important that you track revenue and expenses accurately so that you can plan ahead for low sales periods.

All small businesses can benefit from performing a cash flow analysis—whether you’ve been in business for a short period of time or for numerous years. At Reachout Business Solutions, we are highly skilled at helping small businesses succeed and thrive. Contact us today to learn how to head off cash flow problems.

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