5 Ways to Overcome Cash Flow Problems
Good cash flow is one of the most important aspects of building a healthy business. Liquidity issues are often cited as a major factor in business failures. There’s no denying that it’s important, so cash flow planning shouldn’t be an afterthought.
According to Business Insider, 82% of companies fail due to liquidity issues. A cash flow shortfall occurs when more money leaves the business than it enters. That means you may not have enough cash to cover salaries and other operating expenses during cash shortages.
A liquidity crisis occurs when business leaders do not have a strategy or plan to deal with a liquidity squeeze. When a liquidity crisis strikes, you must be ready to take action to save your business from a premature demise.
Main Causes of Cash Flow Problems
- Seasonal fluctuations in sales
- A failure to send invoices out and collect customer payments on time
- An over-reliance on a small number of customers
- Holding too much stock
- Low-profit margins
- Growing too quickly and putting pressure on short-term finance
- A funding facility that does not meet the business’s changing needs
- Poor financial planning
- An undisciplined approach to spending
- High overheads such as rent and utilities
- Bad debts
- Poor credit control procedures and credit checks
Let’s take a look at how small businesses can work to solve cash flow issues.
Financing Solutions to Improve Business Cash Flow
1. Obtain Short-term Loans for Working Capital
Short-term working capital loans are easy to approve and can be funded by lenders in as little as one business day. These loans have a bit more Annual Percentage Rate (APR) than many other loan options. However, because the company borrows the money for a short period of time, the overall cost of capital may be cheaper than long-term options with a lower APR.
2. Access a Flexible Line of Credit
Finding flexible lines of credit that give you quick access to funds when needed can be an easy way to weather cash flow storms.
Short-term business loans, corporate credit cards, bank overdrafts, and invoice financing give you quick access to cash. The key is to find the right funding source for your business and make it easy for you to cover current and future interest costs so you don’t waste more money.
Current lines of credit, such as overdrafts and invoice factoring, may be a better option than short-term loans if you don’t need access to large amounts of cash immediately. Can be used as a cash cushion if needed.
Credit Cards for Smaller Purchases: A business credit card is another great option for improving your cash flow. Credit card limits are lower than short-term loans and lines of credit. However, they are readily available and many offer reward options for purchases. Credit cards can be used for small purchases or for business purposes that do not require a larger line of credit.
3. Encourage Faster Bill Repayment
Small business owners struggling with cash need to understand what they can do to make it easier for their customers to make payments. Faster repayments can ameliorate immediate liquidity problems. There are many ways to do this, and companies can get creative with the situation.
Set up automatic billing: Ensure predictable payments by enrolling your customers in an automated billing cycle that debits your bank account or charges your credit card on the same day each month.
Accept online payments: Similar to credit cards, online payment options (and popular e-commerce stores) make shopping more convenient for customers. It also helps move inventory more efficiently. For example, consider a walk-in bakery. You have little control over how many baked goods you sell or throw away on any given day. By ordering online, the same company can save money in stores, bake to order, and in some cases even ship nationwide. Online payment by credit card is convenient for customers. If customers can pay online, they may be willing to pay when they receive the invoice. Please note that accepting credit card payments may incur credit card processing fees. Prices may need to be adjusted to compensate for fees.
Encourage early payments and prevent late payments: Most people are cost conscious. Customers are more likely to be willing to pay more if it means they get a better deal or discount. Discounts don’t have to be significant, but they provide a good incentive to pay early is needed.
Let the customer choose a payment date: Every business has a different revenue cycle. Some customers prefer to pay in the middle of the month, while others prefer to pay at the beginning of the month. By allowing customers to choose a date that is convenient for them, they will pay on time.
4. Improve Invoicing Processes
Business owners who do not use an accounting system to bill their customers should invest in an accounting solution. You also need to automate your billing system. Both processes help solve cash flow problems by reducing the number of errors, getting all invoices on time, and giving business owners a clear snapshot of their cash position.
The benefits of automating the billing process include:
- Reduce costly billing errors and delays
- Faster invoice delivery to customers
- Improve data clarity and insight
- Reduce the hassle of collecting overdue invoices
Some of the most common causes of cash flow problems are out of the company’s control. Yes, you can mitigate the risk, but if a customer refuses to pay, your only option is to take legal action. This takes time and incurs costs in the meantime. However, sending invoices quickly and accurately is part of the process that you have full control over.
5. Audit your Finances
If you struggle with cash on a regular basis, you should take a closer look at your company’s finances.
This requires careful planning. If you want to reduce your expenses, you need to distinguish between operational and non-operational costs.
For example, limiting employee overtime can reduce company costs, but what impact will that have on income? Similarly, moving to a more affordable location can reduce rental costs. However, loss of prestige/footage can hurt your business. Likewise, there may be simple improvements you can make to increase your income. Introducing complementary product lines or services is an easy way to increase revenue, but what are the additional costs?
Bottom Line
There are many ways to solve business liquidity problems. Some solutions make billing smarter and get your customers paid faster, while others cut spending. Each solution helps with overall cash management and improves a company’s ability to estimate how much cash they have on hand and how much cash they need in the short term.
