Common Cash Flow Problems Facing Small Businesses 

Cash flow problems can quickly turn your profitable small business into a failure. Many small businesses face difficulties due to cash flow issues even when they are profitable. 

Most cash flow issues are common in all small businesses. Yet many small business owners fail to address them. 

At Pelrio, we advise our small business partners to create a comprehensive cash flow management system. That’s why we have developed an accounting solution that caters to all needs of financial management of your business. 

Let’s guide you through the common cash flow problems facing small businesses and how to solve them. 

Poor Debt Management For Cashflow Problems 

You need to understand different types of loans first. Business loans come with different types of interest rates. It means they vary by cost to your business. 

Then, you need to analyze why you have debt in the first place. Also, figure out which type of expensive debt is costing you more. 

For example, if you are constantly using a business credit card, it will incur the highest interest rate. Similarly, payday and unsecured loans come with high-interest rates. 

Poor debt management will reduce your business cash flows immediately. Consider debt consolidation or refinancing options before you take any other drastic steps. 

Inefficient Inventory Control to Manage Cashflow Problems

Analyze your inventory cycle and know how much time it takes to convert raw material into cash. Once you purchase raw material, it will tie up cash until it is sold as finished products.

You can improve your supply chain to speed up raw material delivery. Also, build strong relationships with your suppliers by finding reliable partners. 

Operational efficiency is another area where you should focus to efficiently convert raw material into finished goods quickly. 

Then, speed up your marketing efforts to generate sales faster. As you can see every step in the inventory management cycle is interlinked. 

Slow Invoicing and Accounts Receivable Collection System

Small businesses are often reluctant to invest in the automation of accounting systems. They rely too much on paper-based inventory and accounting systems. 

It results in slow invoicing and even slower accounts receivable collection from clients. In turn, your cash revenue dries up quickly. 

The first thing to do is to revise your credit policy. If you are offering a lengthy credit period, shorten it immediately. Instead offer better margins to lure in customers. 

Then, you can strain out unprofitable customers who take too long to pay. Also, start chasing your pending invoices aggressively to give your clients a strong message about your collection policy. 

Inadequate Cash Reserves

Many small businesses fail to address the need to set aside cash for emergency needs. Many of them do not even create an emergency fund. 

During recessions or even off-seasons, they struggle to meet expenses. Instead, they look for borrowings and incur interest costs that could be saved otherwise. 

First of all, determine your monthly expenses that are inevitable. Then, start building an emergency fund for 3 to 6 months of your monthly business expenses. 

Your cash reserves should adequately address all necessary expenses including salaries, income tax, rent, utilities, etc.

Not Adjusting and Analyzing Your Monthly Forecasts

As mentioned above, small businesses rely too much on manual bookkeeping practices. A big drawback of that practice is not adjusting and analyzing monthly forecasts. 

Why does that happen? 

Because you do not have data in the digital form to quickly analyze key performance indicators including cash flows. 

You cannot adjust monthly budgets or forecasts unless you have data at your fingertips. It is only possible by using a reliable accounting solution like Pelrio. 

Continuously Changing the business environment requires a flexible forecasting approach that you can adopt with a reliable accounting solution. 

Overspending and Expensive Overheads

A challenge for small business owners is to separate personal and business financial matters. Spending on business and personal expenses combined is a similar challenge. 

You do not realize when you overspend on items like business lunches, travel, office supplies, equipment, and other purchases unless you separate personal and business expenses.

At the same time, you may set up a large infrastructure in anticipation of the high volume of sales. You can save more cash by controlling overheads and keeping your fixed costs to a minimum.

Inaccurate Product Pricing

Product pricing is a vast subject. Although you can set prices according to different pricing strategies, you also need to evaluate your business situation comprehensively. 

For example, consider if your product is unique and can attract more customers. Instead of making it attractive to more buyers, you can charge premium prices and earn higher profits as well as better cash flows.

Setting prices for a service business is further challenging. If your product or service is unique, you need to set customized pricing rather than following the herd.

Overestimating Future Sales

Overestimating future sales can be risky not only for cash flow management but for the business generally as well.

If you see a product acceptance and upwards sales trend, do not exaggerate your future sales. Often businesses turn towards expansion projects and start taking loans as well. 

If your forecasts are inaccurate, you’ll find difficult times ahead. Therefore, creating realistic and achievable sales forecasts is essential in managing accurate cash flows.

Seasonal Sales Issues

Many businesses rely on seasonal sales. For example, if you are in the hospitality industry and run a resort, you can expect a high influx of visitors during the holiday season.

Seasonal businesses see cyclic growth in their cash flows as well. They can face challenging times during off-seasons.

The best option to deal with seasonality is to plan accurately. Again, a reliable cashflow tool can help you solve forecasting and planning issues.

No Access to Debt Financing

Contrary to the first point we mentioned, some businesses struggle to get debt financing. There are several reasons for that.

Some businesses have inadequate sales, others do not own physical assets they can pledge, and some of them don’t have good enough credit scores.

Without debt financing, small businesses will always rely on equity financing. Equity financing is an expensive source of capital.

Also, the unavailability of debt financing means the opportunity costs of not taking on new projects.

How Pelrio Accounting Solutions Can Help You?

Cost-cutting measures and improving sales are conventional approaches to fixing the cash flows of small businesses.

If you want to take a comprehensive approach and overhaul the cash flow management of your business, consider adapting accounting software.

you’ll be able to create comprehensive bookkeeping records, accurately send invoices, and categorize expenses instantly.

Then, you can easily analyze business expenses and income streams. It will also give you accurate reports on where your cash flow is heading.

Finally, you’ll be able to create dynamic cash flow forecasts to plan ahead of your competitors.

In short, moving to a more reliable and comprehensive accounting solution will change the way you manage the cash flows and financials of your small business.

About Pelrio

Pelrio is a simple expense & cashflow management tool that utilizes artificial intelligence to provide real-time analytics, dynamic forecasting, and expense control for small business owners

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