Accounting & Finance

7 Cash Flow Problems and How to Solve Them

Written by Erika Rykun

When it comes to finances, cash is king. You must maintain a free flow of money in your business to ensure its financial health. A steady cash flow is crucial, whether you run a big or small company.

Unfortunately, most businesses fail due to issues with cash flow. It’s especially true for startups and small businesses looking to grow and expand. 97% of businesses in Australia are SMEs. But more than half of small enterprises are experiencing cash flow pressure. Plus, it’s estimated that 82% of retail businesses shut down due to poor cash flow.

 Hence, cash management is key to maintaining your financial health and can be instrumental to your success. This article will help you understand cash flow in the world of business. Keep reading to learn more about seven common problems and how to solve them.

Understanding Cash Flow in Business

Cash flow is simply the movement of money in business. It refers to cash that comes in and goes out of your company’s bank accounts. This is essentially made up of your sales revenues and operational expenditures. Other financial transactions like interests, investments, and royalties are also part of this.

Companies usually categorise cash flow into three types:

●     Cash flow from operations (CFO): The operating cash flow refers to the money directly involved in producing and selling goods. An office lease, utility bills, and labour cost fall under this. Sales earned from selling products or providing services contribute to your cash inflow.

●     Cash Flows From Investing (CFI): The investing cash flow refers to the money spent and earned from investments. This applies to stocks, bonds, mutual funds, REITs, and other investment securities.

●     Cash Flows From Financing (CFF): Financing cash flow refers to the net flow of money used to fund your business and its capital. Financial transactions like paying loans and earning equity fall under this category.

Cash flow management, especially for tradies, is essential. It entails recording and monitoring the flow of money in your business. Your ultimate goal is to earn more than you spend.

7 Common Cash Flow Problems (+ Solutions)

 Now that you understand cash flow, we’ll tackle seven common problems. More importantly, we’ll provide some solutions. Let’s dive in.

1. Delinquent Payments

Delinquent payments can negatively impact your cash flow. Not only will they make you out of profit, but they will also compromise your operational expenditures. Late payments result from these four circumstances:

  •  Customers not paying at all
  • Customers paying partially
  • Customers paying late
  • Collecting receivables too slowly

Unfortunately, 54% of Australian B2Bs have past-due invoices during the pandemic. In October last year, small businesses waited approximately 24 days on average for customers to pay them. It took almost a week (6.6 days on average) for late bills to settle.

Solution: You must collect payments on time for the products sold or services rendered. Take the following steps:

  • Set automated payment reminders to inform your customers.
  • Send invoices ahead of time so customers can prepare.
  • Consider offering discounts for early, full payments.
  • Resort to invoice factoring so you can avoid delinquent payments.

2. Delayed Posting

Your business might also encounter delayed posting. Hence, consider the following payment methods and their posting timeframe:

  • Cash payment: posted immediately
  • Bank transfer – within 24 hours
  • Debit card payment: within 24 hours
  • Credit card payment: 1-2 business days
  • Check issue: Two business days
  • ACH payment: within three business days
  • Online transaction: 1-3 business days
  • Phone payment: 1-3 business days

Solution: The best course of action is to offer different payment options. However, encourage customers to use payment methods that immediately reflect on the account. Better yet, use invoicing software connected to your business bank account. With this in place, your customers can pay on time.

3. Too Many Expenses

Operational expenditure is inevitable in business. Aside from production and labour costs, be wary of other expenses. They can substantially affect your cash flow and business finance in general. 

Below are operating costs you should financially prepare for:

  • Property lease
  • Payroll
  • Utilities
  • Sales and marketing costs
  • Costs of material supplies
  • Taxes and insurance
  • Business loans

Solution: Start by creating a list of all operational expenditures. Determine those that are necessary expenses and those you can cost-cut. Also, find ways to save on your:

  • Utility bills (going green)
  • Material supplies (going paperless)
  • Insurance (asking for lower premiums)
  • Taxes (getting government incentives)

 Lastly, learn how to prioritise your debt payments. All these can help reduce your business expenses and regulate your cash flow.

4. Low-Profit Margins

Unfortunately, your company might have a low-profit margin. Your costs are too high, but your prices are too low. Because you spend more than you earn, you might have a poor cash flow. 

Solution: It’s crucial to review your profit-loss margins. Calculate by taking the profit percentage generated from the total revenue. Also, make sure to cut down on your expenses. Lastly — and most importantly, boost your sales. You can do this by improving your products or services and reaching out to customers.

5. Poor Inventory Management

Inventory management is a balancing act for ensuring steady cash flow. Not having enough inventory means unfulfilled customer orders. Too much inventory means unsold products. Both of them can waste your money!

 Solution: Good inventory management entails striking a balance between your production and market. Make a robust forecast of how many orders your customers may potentially request. Then, procure enough materials and produce enough goods for them. The ultimate goal is to avoid waste.

6. No Proper Bookkeeping and Accounting

Bookkeeping and accounting are essential in business. The former entails recording all financial transactions. The latter involves managing, analysing, and reporting these finances. Both aspects allow you to see your cash flow and help you make sound business decisions.

Unfortunately, some companies do not have proper bookkeeping and accounting. About 45% of small businesses have no accountants or bookkeepers, while 25% still record their finances on paper. 

Solution: Consider hiring a certified account and professional bookkeeper for your business. Also, invest in digital tools such as financial calculators and accounting software. Ultimately, accounting experts and advanced technology can help you manage your business finances well.

7. Rapid Business Growth and Expansion

Every startup and SME aspires to grow its business and expand its operation over time. Meeting such business objectives means you’re good with your cash flow. Hence, you may ask for a business valuation and see if your business is flourishing.

Unfortunately, sudden business growth and market expansion can be challenging. As you make more money, you need to spend more money. If you don’t come prepared and ready, you might not manage your cash flow effectively.

 Solution: The best course of action? Seek help from business experts and finance professionals. They can help manage your finances and ensure a consistent cash flow. Set your business goals, take proper actions, manage your finances, and have accountability.

Staying on Top of Your Cash Flow

As a small business owner, you must always stay on top of your cash flow. It’s more than tracking what goes in and out of your business account. Understanding cash flow is the first step to managing your business finances. Informed decisions will help you stay on top of your company’s finances. Ultimately, this can translate into a boost in your bottom line and business success!

“The opinions expressed by BizWitty Contributors are their own, not those of BizCover and should not be relied upon in place of appropriate professional advice. Please read our full disclaimer."

About the author

Erika Rykun

Erika Rykun is a career and productivity copywriter who believes in the power of networking. In her free time, she enjoys reading books and playing with her cat, Cola.