7 Causes of Cash Flow Problems and How to Solve Them

June 26, 2023

Cash flow keeps the engine running until there's more money heading out the door than what's coming in. Falling short on cash funds is the culprit for 82% of business failures. Fortunately, there are ways to counteract poor cash flow management before it's too late. Here are some of the most common cash flow problems and how to solve them.

Growing Too Quickly

Growth is generally a good thing, but it can negatively impact the bottom line when a business grows too quickly. This typically happens when a company can't keep pace with demand. Scaling up on supply might require more employees or equipment, which results in higher overhead costs that can jeopardize business cash flow.

How to solve it: Apply for a line of credit or business loan. Banks are more willing to lend to a business with a service contract. Negotiating an overdraft is another option, but it's usually better to do this before any issues with cash flow.

Late Customer Payments

Late payments from customers are the leading cause of company cash flow problems. Recent reports indicate that 87% of businesses receive payments after the invoice due date. When customers don't send payments on time, there's less operating cash flow. This makes it hard (or impossible) to pay suppliers and employees.

How to solve it: Offer multiple payment methods or discounts on early payments. Charging late fees could also curb unpaid invoices. Asking for a deposit on an invoice upfront can be a routine policy or saved for customers who consistently pay late.

Unexpected Expenses

Unexpected expenses can blindside business plans when budgets don't account for anything outside of the status quo. Some of the most common unexpected expenses are staff shortages, equipment breakdowns, and supply costs. Market competition can also increase spending on advertising or new technology to stay relevant.

How to solve it: Set up an emergency fund to cover additional costs that could derail daily cash flow. Finance experts recommend saving six months of operating costs for any business cash flow problems.

Low Profit Margins

Low profit margins indicate that costs are too high or pricing is too low (or both). Expecting sales to immediately roll in after starting a new business is another way to end up in the red. Most new companies take 18-24 months to turn a profit. And then there's the reality that 25% of businesses fail in the first year.

How to solve it: Audit products and services to determine the overall cost of delivery. This cash flow analysis will pinpoint where profits are low or negative. Raise prices on products or services with weak margins or drop them altogether.

Poor Financial Planning

Financial planning is the first step in getting a real handle on expenses, but more than half (54%) of business owners don't have a formal financial plan. Running a business without proper cash flow forecasts, budgets, and plans makes it easy to miss cash shortages that would otherwise be easy to spot. 

How to solve it: Set up a balance sheet, profit and loss statement, cash flow statement, and a plan for accessing additional funding if it's needed. Review these financial documents every month to keep cash reserves in check.

High Overhead Expenses

High overhead costs can create bottlenecks in bank balances that put a strain on any cash flow budget. These costs can include rent, utilities, salaries, insurance, equipment, and other common business expenses. Companies either have to sell more or cut costs to offset high overheads and break even.

How to fix it: Look for ways to cut costs without sacrificing quality. This can include renegotiating billing cycles or seeking out more affordable suppliers. Using energy-efficient lights, appliances, and equipment can help reduce utility costs.

Bookkeeping Mistakes

Tracking expenses is typically the first task that gets put on the back burner when business starts to pick up. According to QuickBooks, 61% of small business owners don't know how much they spend or take in each month. Missing or inaccurate financial records can lead to double payments or compliance issues if an audit is required.

How to fix it: Reconcile accounts on a regular basis to make sure every expense is logged. Purchasing or upgrading accounting software can help automate income and expense tracking, which makes preparing for tax time a lot easier.  

How to Manage Cash Flow Problems

Some companies can manage cash flow problems without skipping a beat on production. However, time and resources are in short supply for smaller operations struggling with cash flow shortages.

Outsourcing financial services can offload the pressure of cash flow management. Fractional accountants are a great resource for daily business finances, while fractional CFOs can help solve more complex cash flow issues.  

Book a free consultation with one of our finance experts to learn more about fractional financial services for effective cash flow management. 

Alyssa Huizenga
Director, Business Development
[email protected]

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