Not every business owner is a financial expert with extensive expertise managing money. Cash flow management can be difficult for entrepreneurs starting new businesses, especially when projections are based on quarterly estimates rather than concrete data from the preceding year.

Managing cash flow can be difficult for businesses of all sizes, and it is not uncommon for organizations to experience cash flow challenges at some point throughout their lifecycle. Changes in the market, unforeseen expenses, slow-paying clients, and other factors can all contribute to these issues. However, being aware of these problems and developing a strategy to overcome them can help businesses retain sustainable pretax margins.

Poor cash flow management is one of the leading causes of small business failure. Proper cash flow management requires time and effort, but it is critical to understand where and when your money is coming in and going out. As you monitor your finances, keep an eye out for these seven frequent cash flow issues that can have a significant impact on your organization.

1. Late payments

Late payments are one of the leading causes of cash flow problems for small businesses. Small business owners typically operate with tight budgets and rely on receiving customer payments on time to pay bills and scale. Unfortunately, many clients pay late, some taking well over the standard 30 days to pay what they owe. Waiting over two months for payment can put your business in financial danger, especially when you rely on cash for growth. You may even need to spend time and money getting outside assistance to help with non-paying customers.

How to solve this problem: A great way to avoid late payments is to get up to speed on the best billing practices. Using cloud-based online invoicing software for all your billing needs is a good start. In addition, many online payment solutions provide invoicing tools to help customers pay you on time. These allow your business to accept multiple payment forms, follow up with clients and easily access your invoice records and reports.

2. Lack of profitability

Lack of profit is another common reason companies fail. Yet while there is a correlation between poor profitability and cash flow problems, financial issues can arise for businesses that are making a steady profit too. If your organization has high business expenses and you’re looking to reinvest profits, you need to be extra cognizant of cash flow issues. Plenty of companies have gone under, despite raising millions of dollars, owing to the simple fact that they were unable to generate steady cash.

How to solve this problem: The best method to avoid profitability issues is to always look for more profit-making opportunities that increase cash flow. These include developing new products or services, implementing product markups, doing consulting work and offering discounts and deals to increase traffic to your business.

3. Withheld investment or funds

Locking in an investment or loan to fund your business is always great for capital. However, doing so has some rather severe contingencies. For example, an investor or bank can withhold a portion of your funds if you don’t meet expectations or your income is much less than you projected. This can cause cash flow issues if you rely on those funds to cover major expenses, such as replacing broken equipment or responding to an emergency situation.

How to solve this problem: The best way to avoid investors withholding funds is to give yourself breathing room. When you initially ask for a loan or seek an investment, ask for 25 percent more than “projected” as a line of credit. This way, you have extra cash available for an unforeseen emergency.

4. Tax filing

Whether you’re a monthly, quarterly or annual tax filer, it’s your responsibility to file the correct amount of taxes on time. Tax filing itself isn’t a cash flow issue, but failing to file correctly or promptly can cause detrimental cash flow problems for your business, including interest payments, penalties and even an audit from the IRS. These consequences are expensive and take up valuable time.

How to solve this problem: The best way to avoid these issues is to stay ahead of tax deadlines and consult a tax specialist. Most business owners are busy enough as it is, so it’s a good idea to delegate tax work to a professional. A tax specialist can help you prepare and file your taxes on time and uncover potential tax deductions.

Read Also: The Importance of Cash Flow Management in Times of Economic Uncertainty

When tax time comes around, make sure you have enough cash in the bank to pay what you owe. While you may not know for sure the exact dollar amount you’ll need to pay ahead of time, you can build a basic model based on last year’s taxes versus your growth for the current year.

5. Undervalued products or services

As a business owner, you need to understand the value of your product or service and set your pricing accordingly. You might worry that raising prices will turn people away, but that isn’t necessarily true. Increasing the cost of your product or service also increases its perceived value, which could bring in more customers. Conversely, if your prices are too low, people may perceive your product as less valuable or of lower quality. However, setting your prices too high means you could lose out to competitors offering better rates.

How to solve this problem: To maximize your profit, find a happy medium. Set your prices high enough to increase your cash flow and establish your business as valuable, but not so high that you jeopardize potential sales. Conduct your own market research to help determine the best price points for your company and target audience.

6. Scope creep

“Scope creep” is when a project’s requirements unexpectedly change or increase over time. It’s an all-too-common phenomenon that isn’t necessarily bad, but you’ll want to be aware of it and manage it appropriately with clients. This can ensure you’re being compensated fairly for your work and prevent you from incurring additional costs that impact your cash flow.

How to solve this problem: Determine what is expected of you at the outset of any client project you undertake. If those expectations change, seek compensation for your time and associated costs. Failure to do so means you’re not only being paid less for the work you’ve completed, but your costs could also increase.

7. Use of old equipment

Old equipment not only takes up valuable space but is also inefficient. Constantly replacing equipment can be costly and frustrating, especially as technological advances render older product models obsolete. Outdated, poorly functioning equipment often means not getting the best bang for your buck, so to speak, and may subtract from your bottom line instead of adding to it.

How to solve this problem: Keeping up with the newest equipment will help your business run optimally. Leasing your devices can be a cost-effective method of ensuring you always have the latest and most efficient technology at your fingertips. In some cases, selling old equipment can also result in taxable gains.

Cash flow is vital and necessary because firms cannot pay wages and bills on time without liquid capital. Not having enough cash on hand also means postponing any equipment purchases or new acquisitions. In some situations, a shortage of liquid cash can force businesses to pursue costly financing options, leaving them in debt and raising debt servicing costs.

Having money in the bank is crucial. A lucrative but cash-strapped business may eventually run into serious challenges that reduce profit margins or, worse, eliminate profitability entirely. Similarly, inadequate cash flow management causes larger concerns for an organization, which, if left unchecked, can quickly snowball into a major crisis.

How to Overcome Them Common Cash Flow Issues

1. Inconsistent Income Streams: One of the most common cash flow challenges businesses face is the inconsistency of income streams. This can be particularly problematic for businesses that rely on seasonal sales or have clients with varying payment schedules. From a financial perspective, this can lead to a situation where expenses exceed income during certain periods, causing cash flow problems. From an operational standpoint, it can make it difficult to plan for future growth and invest in necessary resources.

To overcome this challenge, businesses can consider the following options:

– Diversify revenue streams: By diversifying the sources of income, businesses can reduce their reliance on a single revenue stream and mitigate the impact of seasonal fluctuations. For example, a restaurant could offer catering services during slower months to supplement their in-house dining revenue.

– Implement payment terms and incentives: Establishing clear payment terms with clients and offering incentives for early or upfront payments can help improve cash flow. For instance, a software company could offer a discount for clients who pay their annual subscription fees upfront, ensuring a steady influx of cash.

– Create a cash reserve: Building a cash reserve during periods of high income can provide a buffer during leaner times. This reserve can be used to cover expenses and bridge the gaps between inconsistent income streams. A manufacturing company, for example, could set aside a portion of its profits during peak production months to ensure liquidity during off-peak periods.

2. Late Payments from Clients: Another common cash flow challenge businesses face is late payments from clients. This can disrupt the regular flow of funds, making it difficult for businesses to meet their own financial obligations. Late payments can occur due to various reasons, such as client negligence or internal issues within the client’s organization. To overcome this challenge, businesses can consider the following strategies:

– Clear invoicing and payment terms: Clearly communicate the payment terms and expectations to clients from the outset. This includes specifying due dates, late payment penalties, and preferred payment methods. By setting these expectations upfront, businesses can reduce the likelihood of late payments.

– Offer incentives for early payments: Encouraging clients to make timely payments can be achieved by offering incentives such as discounts or extended warranties. For instance, a furniture retailer could provide a 5% discount for customers who pay within 10 days of receiving their invoice, motivating prompt payment.

– Utilize technology for efficient invoicing and reminders: Leveraging invoicing software can streamline the invoicing process and send automated reminders to clients when payments are due. This reduces the chances of oversight and prompts clients to make timely payments. An online service provider, for example, could use accounting software that generates invoices and sends reminders automatically.

3. Overestimating Future Revenues: Overestimating future revenues is a common pitfall that businesses can fall into, leading to cash flow challenges. Optimism and ambition are essential for business success, but they must be balanced with realistic financial projections. To avoid overestimating future revenues, businesses can take the following steps:

– conduct thorough market research: By analyzing market trends, customer behavior, and competitor performance, businesses can make informed projections about future revenues. This research should consider both external factors, such as economic conditions, and internal factors, such as the business’s capacity to meet demand.

– Develop conservative financial projections: When creating financial forecasts, it is prudent to err on the side of caution. By underestimating revenues and overestimating expenses, businesses can better prepare for unexpected challenges and ensure they have sufficient cash flow to cover their operational needs.

– Regularly review and adjust projections: Financial projections should not be set in stone. Regularly reviewing and adjusting them based on actual performance and market conditions is crucial. This allows businesses to identify any discrepancies between projections and reality and take corrective actions in a timely manner.

Overall, cash flow challenges are an inevitable part of running a business. However, by understanding the common issues that arise and implementing proactive strategies, businesses can overcome these challenges and maintain a healthy cash flow. Whether it’s diversifying revenue streams, incentivizing prompt payments, or creating conservative financial projections, taking a proactive approach to managing cash flow is key to building a thriving business.

What are the Causes of Cash Flow Problems and The Strategies to Solve Them?

To be successful, any small business owner must grasp how capital flows in and out of the organization. Unfortunately, one of the most common complaints among small business owners is a lack of finance. For example, according to one poll, more than one-third of small business respondents cited “lack of capital” as the primary cause for the business’s closure.

Proper cash flow management is preparing for both incoming and outgoing revenue to ensure that your business always has the funds it requires to operate. To do so, small business owners and their finance teams must have a detailed grasp of their present payment processes and debts, as well as a strategy for dealing with any future cash flow problems.

Fortunately, most cash flow problems arise from a few basic sources. Business owners who understand these issues are more likely to avoid them or, at the very least, have a plan in place for when they arise.

Avoiding Emergency Funds

Businesses — like individuals — need to be prepared for the unexpected. Surveys show, though, that 17% of business owners say that if faced with two months of declining revenue they would have to close, and other statistics show that 25% of businesses won’t open again after a disaster.

Small businesses that have emergency funds will be more likely to cover unexpected expenses — like a high tax bill, increase in supply costs or repairs after a disaster, for example — which puts them at an advantage.

To build your emergency fund, start by figuring out how much you need (how much money would cover your immediate expenses for one month, for example, and then how many months do you want to have saved), and start putting even a small amount away each month with that goal in mind. Set a reoccurring and automatic schedule so you never forget, and deposit the funds into an account that’s solely for emergency purposes.

Not Creating a Budget 

Budgeting is the first step in getting a real handle on expenses, but in 2021, more than half (54%) of small businesses didn’t have a formally documented one.

Small businesses looking to create a budget should create specific and realistic goals, and overestimating expenses (i.e., expecting to pay more for items this year than you did last) will put you at an advantage. While some small business owners may consider a budget to be limiting, with a properly documented budget in mind, businesses have a financial focus, as well as something to work against when considering what to spend on throughout the year. 

Remember that a budget is a moving target, and goals can change frequently and quickly. Be sure to revisit your budget as things change, like as your business expands, for example, or as inflation causes a sharp increase in the cost of goods, and implement a system to properly track all moving parts so you always know where your large expenses are and can adjust accordingly. 

Receiving Late Customer Payments

Customers are the lifeblood of any small business. When customers make late payments, those delays can cause real problems. Unfortunately, it’s fairly common for customers to make late payments, with 87% of businesses reporting that they are typically paid after their invoice due date.

Small businesses can make a few small changes to help avoid this issue. Sending invoicing quickly, and accepting multiple payment options, is a good start. It’s also important to clarify payment terms and expectations ahead of service and on every invoice. Asking for a deposit or full payment up front — as well as charging a late payment fee — can also help ensure you get paid for your services. 

Uncontrolled Growth 

Nearly half of business owners in one survey said they plan to grow their current location, service, or website this year, and another 11% planned on opening an additional location, service, or website.

Growth is generally considered a good thing for small businesses, but when it comes quickly, or without a plan, it can have an adverse impact on a company’s bottom line. As growth occurs, businesses also need to scale up, accordingly. This often means more employees, more and/or better equipment, and maybe even a larger office space or increased shipping expenses. 

Every smart business owner should prepare for growth by creating a plan for expenses when it occurs. For example, some ways to pay for expenses related to growth include financing through a bank, applying for a small business loan or, for smaller purchases, perhaps buying things with a business credit card. Each of these options come with pros and cons that will need to be weighed by individual business needs. Doing that research and putting together a plan ahead of time can save valuable time when the growth does, hopefully, come. 

Not Paying Yourself a Salary 

When your business is strapped or you’re worried about cash, it makes sense that you might avoid paying yourself a salary in order to put more money back into the company. In fact, 26% of small business owners don’t pay themselves a salary, according to a 2022 small business survey.

Experts say this is a mistake for several reasons. Not only does it lead to more stress for you — which may cause you to be distracted from the business — but it also negatively reflects against the health of the business, and could cause big problems come tax time. Instead of going without, do your research and pay yourself appropriately. One survey found that 46% of founders pay themselves less than $100,000 annually, but consultants, entrepreneurs in the same line of work and industry trade groups are all good places to start when you’re considering a fair wage for yourself that accurately reflects how your business is doing. 

Cash flow problems can be a big stressor on small businesses, but they also can be avoided by understanding how they usually occur. By implementing some of the suggestions above, you’ll be more likely to keep cash flowing so that you can focus on more important things, like the growth of your company.