Cash flow problems can be deadly for new businesses—even if your business is turning a profit, a sudden need for funds when your bank account is low can wipe out a fledgling company. A cash crunch could mean defaulting on loans, angering your employees come payday, and not being able to fulfill invoices.
Furthermore, cash flow problems can cause frustration. Your company might be doing fine on paper, but the timing of cash inflows and outflows not syncing up could lead to problems. With some planning and quick thinking, however, there are simple ways you can improve your cash flow and escape from a sudden cash emergency.
What Are Cash Flow Problems?
Broadly speaking, when we’re talking about cash flow (or cash on hand), we’re talking about all of the funds coming into and leaving your business. Cash flow means accounts receivable versus accounts payable.
You can think of cash almost like water—it flows into your business when you sell a product or complete a service, then it flows out of your business when you buy inventory or pay employees. Problems arise when your cash outflows overwhelm your cash inflows.
Importantly, business cash flow is distinct from profit. A profitable firm can still have cash flow issues, particularly if revenue is intermittent. While you must be concerned with turning profits as small business owners, monitoring cash flow should be a consistent interest because a cash crunch can have immediate repercussions.
What Are the Main Causes of Cash Flow Problems?
The most common cause for cash flow problems that you’ll encounter is low income—if you make more sales more often, your cash inflow increases. A related reason for cash flow issues is late or unpaid payments.
Increased spending can also result in cash flow problems, so make sure you don’t overextend your business’s finances during expansion.
What Is a Cash Flow Forecast?
You can create a cash flow forecast to help you better prepare for the future. When you create a cash flow forecast, you make predictions about your future revenue and expenses.
What are the disadvantages of a cash flow forecast? For starters, it’s a forecast—you make educated estimates in a cash flow forecast and can’t see exactly into the future. Especially if your business is young, you probably have limited information to work with. Still, it’s worth creating as part of a business planning process.
How Do You Solve Cash Flow Problems?
The best way to avoid cash flow problems is to assume that they will happen and save enough money in reserve to cover for weak moments—sometimes called a “corpus fund.” The size of your corpus fund will be largely decided on your specific operation, but you should strive to have enough money saved to get you through a few weeks if your income stream is paused.
If you don’t have a large corpus stockpiled, pay very close attention to movement in your bank account—especially the timing of how you get paid versus when you have to pay expenses. Don’t assume that you’re fine just because a bill was mailed. Small business cash flow can be deeply impacted by just a few invoices being late.
Here are some more strategies for getting out of a cash crunch:
1. Collect What You’re Owed
If you’re in the middle of a cash flow crisis, it’s no time to be shy about collecting the money you’re owed. If your business has outstanding unpaid invoices, reach out with a reminder to your customers or clients. If emails go ignored, a phone call might prompt a more attentive response. You should make a habit of collecting on outstanding invoices in general—collection agencies should only be used as a final option because you’ll lose out on a significant amount of the money you’re owed and the collection process can make waiting for your payment take even longer.
2. Get Paid in Different Ways
One way to increase the chances that invoices will be paid on time is to expand how you accept payments. If you’re tired of waiting for checks to arrive and clear, look into accepting credit and debit cards—online payment portals like PayPal, Venmo, and Square could be useful, too. These methods can significantly reduce the time spent waiting for cash inflows, which, in turn, reduces your risk for a cash crunch. It is possible to set up automated clearing house (ACH) deposits, which are great for collecting automated, recurring payments. Even cryptocurrencies like Bitcoin are an option if your clients are into it.
3. Match Payment Terms
Consider your payment term lengths for customers and compare them to your vendors’ collection terms. Perhaps you agreed to pay your invoices within 30 days but set customer payment terms at 45 days. While this lengthy repayment period might impress your customers, the difference in payment terms creates a cash flow gap. If you find yourself beset by cash crunches, sync up your payment terms.
4. Boost Revenue, Even in the Short Term
It may be possible to raise revenue quickly to overcome a cash flow issue—many retail businesses launch flash sales for this reason. You might not earn as much revenue as you could without discounting inventory, but you can bring in a larger volume of cash inflow in the near term. Be creative based on your business—maybe there’s a way to do a “buy one, get one free” sale for your product or service or to set up a subscription service. This makes it possible to secure sales in advance, so to speak: think about an amusement park selling season passes. While customers hypothetically get a better deal if they use the pass often over time, it raises a serious amount of revenue up front.
5. Raise Funding From Unpaid Invoices
Some loan services will actually provide funding based on outstanding unpaid invoices. This deal isn’t as good as getting paid outright, which is why you should do your best to collect on them first. If this process is taking too long, though, you can quickly get some cash in your bank account through accounts receivable financing. You’ll have to pay interest on these loans, but they can be a lifesaver in a bad cash crunch situation.
6. Monitor Cash Flow With Automated Software
There are various software options that help you to monitor your cash flow and alert you to possible issues. Automating this aspect of your finances can help you to stay focused on growing your business while avoiding upcoming cash-on-hand problems. The Sunrise app has a user-friendly cash flow tool that even includes a feature for creating cash flow reports.