Controlling your business’ cash flow is vital. Consider these four solutions on how to identify and then solve your cash flow challenges.

Does it ever feel like every payment your customers send is already spent by the time you receive it? Receivables move directly into payables to cover bills and payroll. And sometimes, it seems like the receivables aren’t coming in fast enough to cover your commitments.  

If that sounds familiar, you’re not alone. Managing cash flow is a common challenge for small business owners, whether their business is worth $200,000 or $2 million. As a company grows, these issues can become more complex so it’s important to figure out early how to avoid cash flow challenges. 

There are a number of steps that business owners can take to 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.

There are several common threats to healthy cash flow for small businesses. Usually, the problems are seasonal, meaning your business brings in most of its cash during certain seasons of the year; structural, or related to your pricing or expenses; or timing, meaning you have lengthy collections cycles. Consider these four probable reasons for tight cash flow, along with simple solutions for resolving them to keep the cash flowing comfortably.

Collection Issues

The problem: Many small businesses have a hard time collecting on receivables in a timely way. When customers don’t pay you on time, you are essentially performing work and waiting months (or more) to be paid for that work. 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.

Low Priced Goods or Services

The problem: Often, business owners set their prices low to attract customers when they’re getting the business off the ground. But after a business gets going and demand grows for its products and services, price increases are frequently warranted. 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 demand, 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 area or industry are paying for basic expenses. If you find that you’re paying more than others, it’s time to cut costs.

The fix: Study your expenses and cut or adjust the ones you can. For instance, consider renegotiating supplier contracts or asking for more favorable credit terms. You may be able to renegotiate your lease or your contracts with cell phone providers, cleaning companies, and other vendors. Cutting payroll should only be a last resort, as disgruntled employees will only create more problems.

Low Sales Volume

The problem: If your business is not selling as much as you need to sell to maintain the cash flow you want or need, it’s time to boost your sales. If you’re not sure what’s causing your cash flow challenges, take time to discuss the issues with your accountant, financial advisor, or a business consultant. Sometimes it takes a person outside the business with an objective eye to be able to pinpoint the problems.

The fix: Boost sales. That may mean increasing your marketing, hiring a salesperson, or developing new products and services to add new revenue streams. More sales will always equal more revenue, which translates to increased cash flow.

In addition, many businesses are seasonal. If seasonality has an impact on your business, work with your CPA, bookkeeper, and other members of your team to help you plan accordingly. 

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.

Santander Bank does not make any claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained in this article. Readers should consult their own attorneys or other tax advisors regarding any financial or tax strategies mentioned in this article. These materials are for informational purposes only and do not necessarily reflect the views or endorsement of Santander Bank.

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