10 Cash-Flow Problems That Cripple Your Business & How to Solve Them

But here’s the good news: business cash-flow problems can be sidestepped if leaders know:

•  why positive cash flow matters just as much as growth and profitability

•  what to look for (common systemic cash-flow troubles and their early indicators)

•  how to solve for those cash-flow problems

•  how to prevent future cash-flow tangles as your business scales

Let’s take on each of these issues one at a time.

Why business cash flow is critical to survive, thrive, and scale

Cash flow refers to the movement of your most liquid assets. While “liquidity” can include guaranteed investment certificates, government or corporate bonds, real estate, and even art, the term mostly refers to actual cash in the bank (or in your pocket). And how you manage that liquidity can make or break your business.

That’s because businesses need liquidity to:

•  stay on top of payroll costs

•  pay taxes on time

•  purchase inventory

•  buy fixed assets, such as equipment and properties

•  cover operating costs, both fixed and variable

•  pay loan payments on debt

•  dole out dividends

Those are just a few reasons why businesses need a steady stream of cash. Cash is also universally accepted and valued, unlike assets and equity, whose value may be debatable.

Not to mention that profit protection, talent management, financial planning, and, yes, even growth, all depend on how you manage your inflow and outflow of liquid cash.

To complicate things further, global current events have thrown finance leaders into crisis mode. In an April 2020 survey conducted by PwC, only 2% of U.S.-based CFOs expect it to take up to six months to get back to “business as usual.” In June, just two months later, 33% of CFOs said it would take that long (or longer).

Reflecting that uncertainty is the market’s baffling bullishness today and the wildly fluctuating cost of equity capital.

Source: Valuation Advisors at Duff & Phelps, Cost of Capital Resource Center

So how are U.S. companies managing their cash flow amid this destabilization? Generally, not well. Yahoo Finance recently released a startling report showing that nearly half of all U.S. companies have begun defensively hoarding cash. And when forced to spend it, they’re spending to survive — not thrive.

Can a profitable business have cash-flow problems? Absolutely. Even businesses that are well established, have millions in assets, or boast profitability can be too short on cash to cover their immediate needs — which means they can’t scale, grow, or even subsist.

The good news is that Ignite Spot can help you build your cash reserves. We specialize in coaching cash-strapped businesses to create accounting systems and understand their financial position. 

10 Common Cash Flow Issues to Avoid

If you know the most common cash flow problems that entangle profitable companies at varying stages, you can avoid cash shortages to pay your vendors on time and operate your business. Here are the most frequent issues that choke businesses at different stages of growth.

Cash Flow Problems for Start-ups

When your business is new, you tend to be vigilant against self-sabotaging cash-flow problems. Still, cash can slip through in the following ways:

1. Mistaking cash flow for EBITDA: Earnings before interest, taxes, depreciation, and amortization (EBITDA) doesn’t account for cash movement that comes from loan interest, taxes, equipment upkeep, or investment income. If you want a quick-but-flimsy snapshot of your liquidity management, calculate your EBITDA. For a more reliable, accurate portrait of your company’s financial trajectory, create a cash-flow analysis.
2. DIY cash flow tracking: Founders and entrepreneurs bootstrap almost everything. Don’t assume you (or perhaps your office manager) can handle your corporate finances. Outsource this task. Every business needs an expert to comprehensively evaluate their financial health and identify opportunities and risks.
3. Spending too much on growth: Entrepreneurs are innovators who enjoy creating new products and starting new verticals that require a heavy investment in R&D. Conversions, sign-ups, and sales are exhilarating. Building relationships with new segments, stealing market share, and creating a buzz in your industry is exciting. You support that growth by hiring eager new faces, incentivizing frontline employees, upgrading software, and making PR appearances. These activities can heighten the temptation to accelerate even more, but everything done in “growth mode” increases your usual marketing spend. The slow return on your growth investment can quickly sap your cash and even threaten the profitability you worked so hard to achieve.

Outsourced accounting services from Ignite Spot can help you identify blind spots that may lead to one of the above pitfalls. With an outside expert, you get an ongoing, accurate assessment of your cash position. You also receive guidance on how to interpret your financial statements and make decisions to build up your cash.

Cash Flow Problems for Businesses Scaling

As your business begins to scale, you face new and unexpected opportunities. With those opportunities come more cash-flow traps. But if you know what to look for, then you can avoid the hazards.

4. Allowing slow collection of accounts receivable: Maybe you were too eager to sign on a new customer and allowed longer payment terms. Maybe your accounts-receivable person is wearing many other hats. Whatever your reason for allowing receivables to linger, your own business cash flow can suffer as a result.

5. Keeping inventory longer than necessary: You already know that stagnant, stocked product costs you in storage. Too often, managers ignore the quiet strain until the dead stock leads to cash-flow problems. Don’t get to that point. Look at your inventory holding costs with the same supercritical eye you give other line items.

6. “Set it and forget it '' overhead costs: In the early days of your partnerships with vendors, and service providers, your uncompromising negotiations scored you great rates and terms. Now that your business has evolved, you hold even more bargaining power. Failing to negotiate with suppliers to lower your cost of goods sold is a common cause of cash-flow issues at this stage — even for profitable businesses.

7. Failing to forecast revenue: Predicting your sales based on consumer trends or seasonality can prepare you for the fluctuations in monthly revenue. Those who don’t are in perpetual “reaction” mode, which costs unnecessary capital. Learn more on how to forecast revenue.

As you read through these snares, you may consider hiring help. Before you do, check out the outsourced accounting team at Ignite Spot. Finding, vetting, and onboarding an in-house accounting team takes precious time (and risk).

Nip the preceding problems in the bud, before they scale alongside your profitable business. Quote your own bookkeeping services or outsourced accounting services now to do exactly that.

Cash-flow problems for enterprise businesses

A well-established, profitable business can still find itself in need of cash. Here’s how:

8. Poor people management: Smaller teams and scrappy start-ups don’t face payroll bloat as much as their big competitors. Payroll and benefits are the number one cash-flow stressor for many businesses. If you’re not actively educating your people on the importance of their performance and creativity in moving the company forward, then your most valuable asset can quickly become a deadweight.

9. Longer sales cycle: Start-up expert David Skok calculates that for every step on the sales complication continuum, the cost of customer acquisition increases around 10x. This eats directly into your cash flow.

10. Too much in cash holdings: Yes, liquidity is one part of a well-rounded, healthy financial picture. Holding on to excessive cash, however, can have an equal and opposite result, such as the following:

•  Opportunity cost: Excess funds should be put back to work for your business.

•  Perception problems from investors and shareholders: A frozen surplus can arouse suspicion and mistrust.

•  Lax management: It’s human nature to see a safety net as permission to ease off the gas because the immediate pressure and urgency is — apparently — gone.

How to solve cash flow problems for your business

So how do you avoid cash flow problems for your business? You can apply a Band-Aid with a short-term fix, or you can treat the problem with long-term solutions and preventative measures for the future.

Short-term cash-flow fixes

Businesses can improve cash flow quickly in exchange for debt or equity. You can also extend your payables past their due date, but there are relational consequences of this short-term fix.

Other options to immediately improve cash flow include furloughing staff, closing stores, and taking a pay cut yourself. Again, each of these short-term measures comes with repercussions, and the cash-flow problems will return if businesses don’t move on to more strategic measures.

Long-term cash flow fixes

Rather than relying on the list of Band-Aid fixes above, lean on these long-term solutions to plug that leaky cash flow once and for all:

•  Renegotiate partnerships consistently. Establish milestones to obtain volume discounts from vendors as you scale up. Increase your trade credit, and shorten the terms of payment for your own customers.

•  Automate invoicing, bookkeeping, and other administrative accounting tasks. Stay knowledgeable about emerging technology to streamline other aspects of your business. This further reduces pressure on payroll.

•  Hire a consultant to find niche tax credits. Don’t rely on outdated or confusing tax-preparation software if a qualified expert can save you more money and help you avoid unnecessary audits.

•  Outsource positions that don’t need to be in-house, and reduce turnover in your permanent workforce. The cost of replacing an employee these days is between 50% and 200% of that person’s yearly compensation. Contract with an external accounting team or virtual CFO to avoid that costly risk, and renew your commitment to employee retention efforts.

•  Manage your marketing budget wisely. Cut advertising expenses by adopting creative ways to drive less expensive growth such as inbound marketing.

•  Determine how much is too much when it comes to cash holdings. Learn to look out for situations when this best practice may be overruled for a temporary reserve stockpile.

Cash-flow problem prevention measures

Even if you fix your cash-flow problems, they’ll return in time without prevention. These processes let you keep those problems at bay, so you can focus on balancing growth and profitability:

•  Improve visibility and forecasting. Enhanced reporting helps you understand what has happened and is happening in your company today. Forecasting shows you what those events mean for the future. A predictive model lets you change your trajectory to determine where you’ll end up in a month, two months, a year, or even five years.

•  Tighten operational efficiency. Consistent analysis of procedural overlap between departments and operations restores productivity where it tends to slip.

•  Get and stay organized. Your accounting should be a source of interest and excitement to you, not a headache. Well-orchestrated systems and processes make your books a leadership resource, not a chore.

Make business cash-flow issues a problem of the past

The battle between profitability and growth may never end. But if a business fails to plan for smart, sustainable cash flow, then neither growth nor profitability will help.

The only way to know if you’re headed for cash-flow triumph (or trouble) is both exhaustive and granular visibility.

Ignite Spot gives business leaders the visibility and advice needed to prevent cash-flow problems. Download our FREE Cash Flow Forecast Tool to assess your own cash-flow position today.