How to Manage Sudden Small Business Cash Flow Problems

On the surface, cash flow is simply the money that “flows” in and out of your business. But in reality, it’s often more nuanced, particularly when you factor in things like unpaid invoices, bills, payroll, and seasonality. Needless to say, cash flow for a business is important, and it comes with plenty of problems.

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Cash flow problems can happen to any business at any time, and though they are often momentary blips, when not addressed or managed properly, they can be detrimental. In fact, according to a U.S. Bank survey, 82 percent of businesses that fail do so because of cash flow management problems.

Why Would Your Business Experience Cash Flow Problems?

There is a myriad of reasons why a business may experience cash flow problems, but the following are often considered the most common ones:

Seasonal Shifts

Slow seasons can obviously decrease revenue, even if expenses, like utilities, payroll, etc., don’t follow. This can also make it harder to prepare for the busy season, as inventory and supplies, as well as hiring and training employees, all require a capital investment.

Inconsistent Sales

It’s common for sales to occasionally ebb and flow, but when they are habitually inconsistent budgeting, planning, and managing expenses can become challenging, and even a small misstep can create a significant cash flow issue.

Economic downturns and industry disruptions

When consumers face economic hardships, businesses often suffer alongside them as purchases are limited to essentials. Similarly, things like natural disasters, recalls, and product shortages can cause industry-specific disruptions that can send inventory and supply prices soaring or make it difficult to effectively provide products or services.

Unexpected equipment repairs and replacements

There are some equipment issues that can easily be dealt with, but when major equipment, like refrigeration unit, HVAC systems, or construction equipment break, business can come to a halt. Unfortunately, becoming operational again may also come with a hefty price tag.

How Can Your Mitigate Cash Flow Problems

Try to establish an emergency cash budget: An emergency fund is often the ideal way to handle cash flow problems because it means you can rely on your own financial resources to manage expected or unexpected cash flow problems.

Unfortunately, since this requires the ability to save up a significant amount of money, it can be difficult, especially if you aren’t high enough to build a cash reserve or if you’re in the early stages of business.

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Take Out a Short-Term Business Loan

A small business loan typically provides business owners with a lump sum of cash with a repayment term of less than a year. Since there are numerous traditional and fintech lenders in the space, many business owners may find affordable rates and manageable repayment plans.

However, business owners need to qualify for small business loans in the first place. Criteria includes credit, business age, number of employees, and revenue. Given the prospect of cash problems, this may not be a good sign to a potential lender.

Try Relying on Invoice Factoring

Some businesses, particularly those that bill customers or clients, may be able to rely on unpaid invoices to secure funds. In this case, the business owner would receive a percentage of the total value of the invoices up front, receiving the rest, minus the lender’s fees, when the invoice is paid in full.

If you don’t rely on invoices for payments, obviously this won’t be an option. Further, in some cases it can be costly, depending on the total percentage kept by the lender.

Utilize a Merchant Cash Advance (MCA)

With an MCA, business owners can access funding in exchange for a percentage of their credit and debit card sales, plus the lender’s fees. They often result in quick funding and may be an option for business owners who don’t have good credit.

Unfortunately, there are some problems to consider. the structure of an MCA means business owners must part with a portion of their daily revenue, which can create even more cash flow issues. Further, MCAs often have much higher fees when compared with traditional loans.

Reduce Your Overall Expenses

Though there are necessary costs associated with running a business, it’s easy to fall into unnecessary debt obligations. If you anticipate cash flow issues, then it’s important to review your expenditures and eliminate those that aren’t absolutely necessary to operations. Similarly, a review of operations may also unlock opportunities to streamline procedures and cut costs.

For some, this is possible, but for others, particularly those who are already operating on the bare necessities, budgeting and trimming expenses isn’t an option.

Conclusion

Cash flow problems can occur for a variety of reasons, both expected and unexpected. But fortunately, there are a variety of options to help prevent and address this type of problem. For some business owners, it may be obtaining temporary financing, while others may just need to review their current operational needs and adjust to create a more efficient budget.

About the Author

Andrew is a Content Associate from LendEDU - a consumer education website and small business. He has been writing about personal & business finance for the past several years, all while working & learning in a small business environment.

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