Cash Flow Management Guide

8. Common Cash Flow Problems and How Small Business Owners Can Fix Them

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Business Finance

Common Cash Flow Problems and How Small Business Owners Can Fix Them

Mar 09, 2023 • 6 min read
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      It takes money to make money. You’ll hear this saying often in business, and almost every small business owner knows the challenges of managing cash flow. According to a 2019 Lendio survey, cash flow is the number one challenge small businesses face. Get on top of your cash flow management with the following tips.

      What is a cash flow problem?

      Businesses face a cash flow problem when they have more cash going out than coming in. This creates pressure on the business as it struggles to pay bills and lenders. 

      What causes cash flow problems?

      Businesses can run into cash flow troubles for multiple reasons. We outline the most common problems below and how to solve them.

      1. Problem: Lack of financial visibility.

      Having full visibility into your cash flow is the critical first step to better managing it, but not every business owner has adopted proper forecasting tools. 

      Solution: Perform a cash flow forecast.

      By performing a cash flow forecast you are able to track changes in your business’s cash balance by calculating income versus cash expenditures. This process will help you identify two crucial patterns to business success:

      •         How much money is coming in and going out of your business.
      •         When money is coming in and going out of your business.

      Both are vital to helping you plan ahead and keeping your bills and employees paid. A forecast usually covers a year, however, it can also cover a short-term period such as a week or a month.

      2. Problem: Falling behind on your finances.

      Staying on top of your business finances takes time and effort, so it can be easy to get behind or not completely understand how to use your financial statements to track your business’s cash flow.

      Solution: Get help

      If you want to have a successful business and make money, keep your eye on the bottom line. As you consider the cost-benefit of every expense, remember there are a number of expenses that will benefit the profitability of your company. These might include getting a bookkeeper to keep your business finances in line or hiring a CPA to help streamline everything from payroll options to retirement savings plans.

      3. Problem: Late payments

      Late payments are a common cause of cash flow problems. The longer it takes for your customers to pay you the less you can rely on consistent income to pay your bills. 

      Solution: Have consistent terms.

      If you want consistent results, provide consistent terms. Make sure that partners and customers understand the rules of working with your business. Some good policies to include are a 5 percent late payment penalty after 5 days, and for service-based companies, a work stoppage after 30 days past due.

      Be proactive about collecting payments from your clients. Small businesses that don’t have clear collections policies and late payment penalties are often taken advantage of. It’s also a good idea to create an internal timeline of procedures: when you’ll send an initial invoice, issue payment reminders, make collections phone calls, and cut off services if invoices aren’t paid.

      4. Problem: Long payment cycles.

      In some industries, it can be common for bills to not be due for several months creating a drought of cash as you wait for payments to come in. 

      Solution: Incentivize early payment.

      After setting-up consistent and clear terms with your clients, you can take it one step further and offer incentives to specific clients. Offering a two percent discount in exchange for payment in 10 days or less will motivate clients to pay their invoices not just on-time, but early.

      5. Problem: Payment fraud

      According to the data, 16 percent of small businesses have experienced payment fraud in the last year. Of the small business owners surveyed, 25 percent have experienced a chargeback (a fraudulent or disputed transaction that the business ends up having to make good on) in the last year.

      Many business owners reported multiple instances of fraud; eight percent reported 10 or more instances in the last 12 months. New businesses were particularly susceptible, with 21 percent being hit with fraud in the first year of business and more than half experiencing fraud in the first two years.

      Solution: Partner with a verified payment processor.

      Businesses that use software platforms like Shopify, Square and Zoho were 15 percent less likely to have cash flow management issues. 

      If you are having problems rowing the cash flow boat, a small business loan can help you navigate your way toward long-term business success. Combine that with preparing a cash flow forecast, outsourcing some of your needs, implementing consistent terms, and incentivizing some clients to make prompt payments, to improve your cash flow.

      Manage your finances with confidence.

      View loan offers, receive payments, and track your cash flow with the Lendio mobile app.

      About the author
      Elizabeth B. Jensen

      Elizabeth Jensen has written for a variety of small businesses and travel organizations, including Visit Salt Lake and Ski Salt Lake. She has a B.A. in Public Relations.

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