Most businesses experience shifts in income from month to month. For seasonal industries or for regular businesses experiencing unexpected ebbs and flows, getting a handle on ever-fluctuating working capital can be challenging, to say the least. If your business is successful, but you find yourself asking why bills are so unmanageable some months – you may have an issue with cash flow. The good news is that the issue is solvable, and the business advisory experts at DHJJ have you covered. Read on to learn more about where your cash flow problems may be coming from and how to nip them in the bud.
What is a Cash Flow Problem?
Put briefly, cash flow problems happen when cash outflow exceeds cash inflow. This could happen for any number of reasons: many businesses were affected by the COVID-19 pandemic, for example, and many more by the national “great resignation.” (During the great resignation, the rate at which employees have voluntarily quit their jobs has shown to be 25 percent higher than pre-pandemic levels.)
It’s important to remember that flow challenges are normal, and they do not mean your business is failing, or even struggling, per se. In fact, according to the 2019 QuickBooks State of Small Business Cash Flow survey, 61 percent of small business owners “regularly struggle with cash flow issues” – and that’s before the COVID-19 pandemic! The same survey also found that as a result of cash flow issues, 32 percent of those small business owners had to halt payments to their vendors, loan repayment plans, their employees, or themselves.
Why are we Experiencing Cash Flow Problems?
A net cash outflow isn’t necessarily a bad thing – sometimes, it can even be a good thing, especially if it means a business owner has invested heavily in their business that month and will see rewards later. Heavy cash outflows don’t become a problem until they occur month after month. At this point, it becomes difficult to meet payment obligations. If you’re running into a net cash outflow on a recurring basis, considering the following common root causes for cash flow problems is a good place to start.
Common Reasons for Cash Flow Problems:
1. You don’t have enough capital on-hand.
Could your business handle six months of its normal expenses using the cash reserves you have at the ready? If not, you may need to increase the money you have on hand. Most businesses are not prepared to cover a multi-month revenue loss, but if we’ve learned anything in the last several years, it’s that outside forces can have huge effects on revenue. Having a cash reserve hefty enough to cover several months’ worth of expenses isn’t just a method of saving for a rainy day, it’s a guarantee that your business will be able to handle the very real threat of a storm.
2. Your debt payments are too high.
Are you overpaying on your current business debts? High interest loans and credit cards can be crippling to a business that is experiencing even a slight dip in revenues. If you’re struggling to meet your financing obligations in your slow months, explore other methods of repayment. Supplier financing is a great option for those that have it, as is debt consolidation and refinancing for a lower interest rate.
3. You’re not getting back what you’re owed.
Take a look at your accounts receivable, and you may find that your cash flow problem isn’t exactly your “fault.” If you have many customers with outstanding balances, you can be missing out on tens of thousands (if not hundreds of thousands) of dollars in cash inflows that you deserve and need to keep your doors open. Accounts are less likely to be collected the longer they remain outstanding.
If you’re running into this issue, stay on top of your invoices, send reminders to customers with bills, and consider offering discounts for early payment. You may be able to negotiate with customers in order to get them to send payment, or, if you have the capacity, you can arrange a payment plan. When all else false, using a collection agency to collect on overdue accounts can help you boost your revenue in a pinch.
4. You have excess inventory.
You need products to sell, but did you purchase too much? How much of your inventory is sitting on the shelves from last season, last year, or even the last several years? The cost of holding too much inventory can 25 percent to 32 percent of what the product is worth.
How to Improve Your Cash Flow Problems: 4 Tips to Consider
Whether you’ve run into any of the above problems or if your cash flow emanates from a different source, there are a few tried and true tips to consider for increasing your cash flow and getting back on track. Consider the following suggestions for solving a cash flow dilemma:
1. Prepare a business budget.
All businesses need a budget, but only about half of small businesses had a budget for 2021. The other half of businesses may have been totally unprepared for what could have been an expected lapse in revenue. Analyzing your past several years’ performance can help you recognize trends in inflow and outflow times, manage your business revenue cycle, and create a plan to meet expenses even at low points.
2. Reduce business expenses.
“Reduce your expenses” sounds obvious – if you could, you would, right? The fact of the matter is that many businesses are overspending on areas they’re not even aware of. Conducting a thorough audit of costs from large scale to small will likely identify areas of waste, even if you think you’re operating a lean business.
Starting from the top, are you paying too much in rent? Your landlord may be willing to negotiate your lease, especially if you’re nearing the renewal period. Even if you’re firmly mid-contract, you may still be able to uncover a lower rate. Start by considering what would benefit your landlord, and work around those items as a negotiation tactic. Would your landlord like you to sign a longer lease? Perhaps they’d be willing to lower your rate in exchange. You’re your landlord need your space? They may have a smaller space your business could downsize to, saving you money each month. The same negotiating tactics can be used to lower payments to vendors, especially if you have a history of on-time payments and consistent ordering.
You might also be overspending on labor costs. You can cut back without laying off employees by reducing overtime, halting services like housekeeping, or DIY-ing your building upkeep tasks, like landscaping.
3. Raise service or product pricing.
Inflation is up in almost all U.S. industry sectors. Do your prices match? Raising prices feels like a tough pill to swallow for many small businesses, but your customers may not react as strongly to a price hike as you might think. Data from the Society for Human Resource Management shows that salaries are up several percentage points in 2022, increasing the likelihood that your customers will be able to handle paying a bit more.
4. Boost sales activity.
Most small businesses have tried everything to boost sales, but the world is changing, and so are strategies for raising revenue. If you’re not accepting credit cards or making online sales yet, now is the time to consider modernizing. Increasing your customer base is a great place to start. Leverage your existing clientele to help by asking for reviews on sites like Google and Yelp if customers have had a good experience. This can help raise awareness amongst others in the community when they’re looking for goods and services that you already offer. Other modern ways to boost sales in 2022 include advertising on social media, sending email marketing or coupons to existing customers, and partnering with another business to embark on a joint advertising venture or a bulk deal.
DHJJ: Your Partner for Business Advisory Services
Reach your goals more efficiently with the knowledgeable business advisory service specialists at DHJJ. Our experienced specialists focus on the areas that affect your business and your future, providing the services that make all the difference between confidence and uncertainty. Contact us today by connecting online or phone at (630) 420-1360.
