How to Solve Four Common Business Cash Flow Challenges

Controlling your cash flow is vital to your business. Here are four solutions to help you identify and solve the most common cash flow challenges.

Sometimes it can feel like every customer payment is already spent by the time you receive it. Receivables move directly into payables to cover bills, rent, and payroll, and then, you rinse and repeat. It often seems like the receivables aren’t coming in fast enough to cover your commitments, especially if your business is struggling financially amid COVID-19.

If that sounds familiar, you’re not alone. Managing cash flow is a common challenge for small business owners—with 82 percent of business failures attributed to mismanaged cash flow—and these challenges can be exacerbated during economic crises. As your company grows, these issues can become more complex, so it’s important to figure out how to tackle cash flow challenges and prepare your business for unprecedented times.

There are several ways business owners can minimize cash flow challenges and help keep their businesses liquid. To overcome the challenges, it’s important to understand the underlying issues that contribute to a cash crunch, as well as the solutions business owners can pursue during periods of crisis.

There are several common threats to healthy cash flow for small businesses. Seasonal threats are when your business brings in most of its cash only during certain times of the year. Structural issues relate to how you price your products, as well as how much you pay in business expenses. Timing issues indicate lengthy collections cycles, such as waiting too long for client invoices. While business owners typically expect these common cash flow disruptions, unpredictable threats such as economic downturns or financial crises such as the COVID-19 pandemic can also unexpectedly upend cash flow. While these are the common culprits, investing in solutions to help your business prepare for any revenue threat will keep cash flowing comfortably no matter your economic situation.

Collection Issues

The problem: Many small businesses have a hard time collecting on receivables in a timely manner. During the COVID-19 crisis or other periods of economic downturn, customers may not be able to pay you on time, which means you are essentially waiting to be paid for work that you have already completed. If you find that you’re frequently waiting on late payers, that could be the source of your cash flow challenges.

The fix: Increase collections efforts to make sure your customers are paying you on time. That may mean setting up automatic payment reminders to be sent to customers every 30 days, offering discounts to early payers, or even contracting with a collections agency to pursue delinquent accounts. If you don’t already accept credit card payments, consider taking plastic to get immediate payments.

Also, reconsider your bookkeeping software. Some programs automatically send invoices by email, handle credit card transactions, and keep track of late payers.

Depending on the nature of your business, you may be able to take a direct approach, as well. While getting invoices paid is vital for your cash flow during a downturn, customer retention is just as important, so you’ll need to take a careful approach in order to keep your clients’ business. Reaching out to customers through email or over the phone to discuss alternate payment options can be helpful, particularly if they’ve been impacted financially, as this can help you maintain long-term client relationships.

Low Priced Goods or Services

The problem: Before COVID-19, business owners may have set their prices low to attract customers or to get their businesses off the ground. If your business model has shifted due to the economic conditions, ensure that you are pricing your products appropriately to offset any new costs that may occur, such as shipping. If your prices are too low to match your expertise, experience, or demand, it’s probably time to rethink your pricing model.

The fix: Think about whether there are other ways to price your goods or services. For instance, if you run a service business and you’ve always priced services by the hour, consider pricing by the project instead so you’re not penalized for faster work. If you sell goods that are in high demand, such as PPE, consider an incremental price increase. By raising prices, you can automatically boost your cash flow without increasing your volume.

Too-High Expenses

The problem: Maybe you’re paying too much for rent, utilities, marketing, payroll, or other business costs. If that’s the case, those expenses will contribute to a cash crunch. Do some research to find out what other businesses in your industry are paying for basic expenses, or ask your peers how they configure these costs. If you find that you’re paying more than others, it’s time to make cuts.

The fix: Now is a perfect time to study your expenses and cut or adjust the ones you can. Many businesses took stock of their cash burn to find ways to cut their expenses due to the COVID-19 crisis. It’s a good practice anytime, but it can help you save even during a recession. Take a look at your vendors, services, and other overhead, and ask what is truly essential. You can also potentially lower these expenses without cutting them entirely. For instance, consider renegotiating supplier contracts or asking for more favorable credit terms. You may be able to renegotiate your lease or contracts with cell phone providers, cleaning companies, and other vendors. Sometimes the key to receiving a favor is to ask. Cutting payroll should only be a last resort.

Low Sales Volume

The problem: Selling your inventory is hard during difficult economic times. If your business is not selling as much as it needs to maintain a comfortable right cash flow, it’s time to boost your sales. Perhaps the current economic crisis is impacting your sales, but there may be other revenue issues that can be tackled to make the crisis manageable. If you’re not sure what’s causing your cash flow challenges, discuss the issues with your accountant, financial advisor, or a business consultant. Sometimes it takes a person outside the business to objectively pinpoint its problems.

The fix: Boost sales by making your products more accessible. That may mean increasing your marketing, hiring a salesperson, or developing new products and services to add more revenue streams as your budget allows. In many cases, understanding the source of your cash flow challenge can help you determine the best way to fix it. And sometimes, a short-term business loan or line of credit can be a helpful solution for accessing cash when you need it. If you know that seasonality is your biggest challenge, make sure your line of credit will be available (and not up for renewal) during the season you need it most.

 A free option that will make your products more accessible is selling them online and promoting them via social media marketing. More sales will always equal more revenue, which translates to increased cash flow.

To gain additional insights for running your small business and accelerating your cash flow, contact your Relationship Banker or schedule an appointment with Santander today. 

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