Did you know that cash flow issues are the top cause of business failure in the United States? It’s true! Even profitable businesses find themselves in situations where cash flow makes it impossible to continue. Cash flow problems are generally associated with lack of consistent revenue, but in reality, there are so many other problems that can result in negative cash flow, even if a business is performing well on other accounts. Today, we’ll talk about what those problems are and at least four ways to address short-term cash flow problems head on.
What causes negative cash flow?
On a basic level, negative cash flow occurs when your business spends more money than it receives. When this happens, businesses struggle to cover everyday operating expenses and can feel pinched to meet obligations, like rent, payroll, or contractor payments. Even if a business is not encountering negative cash flow, entrepreneurs can still feel pinched if cash flow isn’t abundant. A lot of businesses that fail due to cash flow issues do, in fact, have the money to cover basic overhead expenses but lack the capital and flexibility to invest in growth and scaling up.
The most common causes of cash flow problems
When it comes to poor cash flow, the most common issues are low profits, overinvesting against your best interests, mismanagement of expedited growth, expensive overhead costs, and unexpected financial expenses. Thankfully, all of these factors can be managed with proper bookkeeping management and the help of financial reporting and forecasting.
How bookkeeping helps with cash flow
Working with a bookkeeper is one of the most productive things your business can do if you struggle with maintaining positive and abundant cash flow. Not only can you bookkeeper identify that you’re having a cash flow problem, they can also diagnose what’s causing that issue. For example, your bookkeeper might notice that you’re spending down to your last dollar on payroll every month but that it’s because a lot of your clients aren’t paying you on time. This is a common cause for cash flow issues.
Working together, your bookkeeper can suggest solutions, like automatic invoicing, sending automated reminders, or drafting a late payment policy that will incentivize your customers and clients to pay on time. There are so many ways that your bookkeeper can help you solve cash flow issues.
How can business owners fix short term cash flow problems without the help of a bookkeeper?
We’re glad you asked! Working with a bookkeeper is the best pathway to cash flow success, but there are a few tips we can share with you to help you get started on your journey to better cash flow in the short term:
Evaluate your billing process
More often than not, cash flow issues are caused by inefficiencies in your billing process that slow down how quickly you receive cash from your customers. We recommend doing a thorough evaluation of your billing processes to address these concerns. Some things to consider are how long your invoices are generally in A/R, what percentage of clients don’t pay on time, and the processing speed of your payment processor. This will help you identify solutions for speeding up your cash flow and provide an immediate, short term fix for many of the issues you’re facing.
Apply for a business line of credit
This solution is not ideal for business owners who struggle to manage debt responsibly, but for those who can, using a business line of credit can be a great way to effectively manage your cash flow. By using a line of credit, you can ensure that issues like late payments and payment processing speeds do not hinder your business’s performance. Just make sure that you pay your balance in full every month.
Create a budget
If you find that cash flow is a problem month after month, it’s a sign that you could be overspending or that you simply don’t have a handle on what you are spending in your business. Creating a budget and tracking your spending each month will help you determine where you can easily make cuts that will free up cash in your business. This will reduce the feeling of being pinched for cash and make managing your business so much less stressful.
Negotiate accounts payable
Timing is everything! If you’re feeling like certain times of the month are tight for your business, try negotiating different payment due dates. This strategy will not reduce your expenses but it will make them easier to manage by freeing up your cash flow throughout the month. This is one of the simplest and most effective ways to improve cash flow instantly!