Cash Flow is the biggest issue for small businesses. According to the survey conducted by the small business administration( SBA ) around 82% of small businesses fail due to cash flow. There are a variety of reasons through which cash flow issues occur such as a lack of capital, late payment, high overhead costs, etc. In this article, we will discuss 'How to deal with cash flow problems in small businesses' and help them get rid of this hazard.
What is the cash flow problem
cash flow problems examples
causes of cash flow problems and solutions
famous companies with cash flow problems
What to do when you have cash flow problems?
Can a company be profitable and still have a cash flow problem?
Why do small businesses struggle with cash flow?
How can a small business manage its cash flow?
cash flow problems and solutions pdf
What is cash flow?
To solve the cash flow issue we have to know what is cash flow. It is the total amount of cash in and out of a company.
For the survival of any business cash flow must be positive means more money comes into a business compared to going out. The formula for calculating a cash flow is operating cash inflow subtracted from operating cash outflow. Operating cash inflow consists of cash received from sales, loans, investments, and other sources. Operating cash outflow consists of cash Paid to employees, suppliers, creditors, hiring, and other sources.
Cash Flow formula = operating cash inflows - operating cash outflows
Must Read: What is Cash flow, its head? importance of cash flow in small businesses
What is the cash flow problem
The problem that occurs in a business due to a shortage of cash is known as a cash flow problem. In this situation, business suffers to pay their bills or to run their business in some cases cash flow leads to business failure.
cash flow problems examples
Some common examples of cash flow problems consist of:
1. Late payments from Customers ( unpaid invoices )
when customers don't pay their bills on time then businesses have to suffer for it. Because business needs cash for sales, marketing, product creation, etc, and if there will be unpaid invoices business can not pay their expenses and may fail after a certain period.
2. High amount of debt
You buy loans to grow your business. But, too many loans can become a reason for your business failure. So, it is essential to pay the debt before business expenses. [ Important: Pay a high amount of debt first because it contains a high amount of interest rate comparatively low amount of debt ]
3. Record of accounts payable
Companies have to track records of accounts that they have to pay to a third party. Such as banks, or someone you borrow cash from.
Record of accounts receivable
Companies have to track records of accounts ( third parties) that owe money from companies. Such as a company or an individual.
causes of cash flow problems and solutions
3 main causes of cash flow problems and solutions
1. Poor budgeting
Poor budgeting can create cash flow issues. Eg: when you don't have a proper budget then you may spend extra money on activities that are not necessary and your expenses can exceed your income.
Solution: Make a proper budget for the activity and your expenses should be in a set budget. So, you don't have to face cash flow issues.
2. Regular review of cash
When you don't know how much amount of cash is available in your business then you make suffer from implementing a strategy and other issues. such: as marketing or product or service and doesn't able to make financial changes.
Solution: Review the cash contain in your business and focus on how can you improve it. You can do this by yourself or by brainstorming with your team or employees.
3. Lack of working capital
When you have a shortage of working capital and you are not able to pay expenses such as employees, equipment, suppliers, etc and you arrange cash through a bank loan or any other medium. They charge an interest rate on it. Due to this, you may suffer cash flow issues in the future.
Solution:
You can analyze and reduce your unnecessary expenses.
You can negotiate with suppliers to extend the payment date.
You can request customers to pay for unpaid invoices or you can sell unpaid invoices to a factoring Company [ the company which gives you instant and charge some amount in exchange for unpaid invoices ]
famous companies with cash flow problems
1. Hertz: Hertz filed for bankruptcy in 2020 because the company is not able to pay its debts and the pandemic-related downturn in travel.
2. Sears: In 2019 sears filed for bankruptcy because of the deficit of $1.2 billion in the cash flow report in 2018.
3. American Airlines: due to the pandemic in 2020 Americans Airlines suffered from cash flow issues due to a lack of cash flow it filed for bankruptcy.
4. JC Penny: this company also struggled with a cash flow crisis due to which it filed for bankruptcy in 2020.
What to do when you have cash flow problems?
1. Increase the quantity top selling products.
2. Decrease or remove low-revenue products.
3. Analysis and reduce business expenses if possible.
4. You can reach out to investors and can sell your business equity
5. Negotiations with banks or people from whom you borrow loans to reduce the interest rate and expand the date of payment.
6. You can increase your product price. if your product is solving something that others do not then people pay for it.
7. You can research on the Internet about the company that had cash flow issues and how they solved them. Learn from them and apply the learning to your business.
Read = how to get investors for your small business in 2023
Can a company be profitable and still have a cash flow problem?
Yes, a company can be profitable and still have a cash flow problem. This occurs when the company is not generating enough cash from its operations to meet short-term obligations or the company invests its Cash in long-term growth which requires a high amount of cash upfront.
Why do small businesses struggle with cash flow?
There are plenty of reasons on Why do small businesses struggle with cash flow
Some of them are:
1. When a business does not have enough cash to cover its expenses.
2. When there is a delay in receiving payments from customers.
3. When a business does not have enough resources to plan and manage cash flow.
4. Small businesses often struggle with cash flow due to a lack of established credit lines.
How can a small business manage its cash flow?
There are multiple ways through which a small business can manage its cash flow such as:
1. Payment priority
Small businesses have to understand which payment is primary and which is secondary and have to pay accordingly. For instance: You want to make a new product and your business is in debt in this case you have to pay the debt first.
2. Payment collection
You have to collect payment as fast as possible for this you can provide online payment options to consumers and you can offer an incentive for early payments.
3. Inventory management
You have to regularly check your inventory. This will help you to track which products are in extra quantity and which are in less quantity. So that you can increase or decrease the amount of product creation according to the product availability.
cash flow problems and solutions pdf
Source = iimchyderabad
Read more:
• What is Invoice, its types, benefits, sell invoices
• Cash flow hedge, advantage and disadvantage, Accounting & journal entries
