Cash Flow Problems: Why They Occur & How to Solve Them

Published on June 27, 2023

On a fundamental level, cash flow problems occur when a business has too many expenses without enough revenue. In reality, it’s often a lot more complicated than this, but it can definitively be said that when you have cash flow issues, it can bring your business operations to a halt.

So, how do cash flow problems start? And what are the best ways to avoid cash flow problems — or fix them? Let’s explore some of the most common issues that can lead to cash flow problems and some potential solutions for solving them

In this article, we explore the general nature of cash flow challenges. To investigate this topic in more detail—particularly how to protect your business from cash flow issues—check out our downloadable resource: How to Use A/R Automation to Improve Cash Flow.

What is cash flow in business?

The business world is drowning in (pun intended) water-related money metaphors. You have revenue streams, liquidity, trickle-down economics, and the subject of our article today: cash flows. 

“Cash flow” refers to the net funds moving into and out of your business during a set period. And this focus is exclusively for realized funds—or cash—rather than credit lines, unearned revenue, or anything else that might appear as an income or expense on your typical balance sheet.

A positive cash flow suggests that a business is collecting more funds than it is spending. In contrast, a negative cash flow indicates the opposite — that more money is leaving the company than it is receiving.

How many businesses have cash flow problems?

If you spend time monitoring business trends — collectively or within your organization — you’ll quickly notice that operations tend to be cyclical. Rarely do you find an industry, market, or corporation that performs on a steady, predictable basis; the most consistent element of any business trend is its inconsistency.

Instead, successful companies need agility, adaptive strategies, marketing efforts, and growth plans that conform to the realities on the ground. A strong cash position is a common mechanism used to maintain a business’s flexibility. Unfortunately, problems with cash flow are relatively common.

Looking back at data from before the COVID-19 pandemic, a 2019 survey conducted by Intuit QuickBooks found that 61% of responding small business owners struggled with cash flow. Further, 52% indicated that they had lost $10,000 or more by missing out on a project or sale due to a lack of funds.

And while corresponding post-pandemic numbers regarding overall trends are currently hard to find, according to a post-mortem study of failed business startups conducted by CB Insights, 44% of responding companies cited “running out of cash” as the primary reason for closing their doors. The survey found that 3.7 more startups in 2022 struggled due to cash flow and investing issues than in 2020.

Cash flow problem causes and solutions

The problem: Delinquent payments

The longer it takes to get paid, the thinner your cash reserves will run. So ineffective accounts receivable (A/R) processes that lead to a longer payment cycle should be avoided. These delays might be the result of:

  • Inaccurate invoices
  • Process bottlenecks
  • Poor follow-up
  • Too many required authorizations

Further, you’ll want to spend sufficient time vetting any existing or potential customers you are considering to offer credit terms. After all, allowing a struggling or unresponsive business to secure goods and services without up-front payment leaves you vulnerable to building up bad debt and losing revenue.

The solution: Automated A/R

You’ll quickly find more cash in your accounts as you accelerate your payment cycle. Automating your A/R efforts is one of the easiest ways to get paid faster. An effective automation platform will help you identify and avoid process bottlenecks, and automated workflows will remove unnecessary delays. 

Similarly, when you employ these best practices for your collection efforts, you’ll quickly find that chasing payments without human intervention on a preprogrammed schedule can promote more consistent, prompt, and responsive customer communication.

Further, by supplementing these tools with early-payment discounts and easy-pay options, you can remove additional barriers from the payment cycle.

The problem: Excess inventory

Any company manufacturing a physical good knows the importance of effective warehouse management. As inventories grow, the floorspace, technology, and personnel needed to handle these products also develop. Keeping too much inventory in stock can artificially inflate your distribution costs and begin to tie up more of your cash reserve than necessary.

The solution: Optimized production runs

Manufacturing too much can be as harmful as manufacturing too little. But by matching your production efforts with accurate sales data, you can avoid sitting on large pools of inventory or raw materials. Depending on the size of your company, you should invest in just-in-time manufacturing tools to help you manage the appropriate balance. Otherwise, consider tuning or expanding your analytics capabilities for more precise insight into your needs.

The problem: Low reserves

Bad things happen to good businesses. You might experience a market downturn, production hiccups, seasonal sales, labor shortage, or any challenge temporarily limiting your income. Unless you have a prediction engine worthy of being in a sci-fi novel, you likely will have little — if any — advance notice before these problems hit.

A healthy cash reserve will help mitigate any potential fallout and give you the time needed to weather a temporary shift or adapt to a permanent one. Conversely, if you have a relatively small account balance when trouble hits, you’ll likely have to quickly obtain loans — which may or may not offer reasonable payment terms — or face a potential shutdown.

The solution: Reduced waste

Finding ways to make your money last longer can be handy when refilling your cash reserves. Are there unnecessary or duplicate processes that you can eliminate? Do you pay for any non-critical services that you can temporarily suspend? Can you cut back on your packaging, opting for a simpler, more sleek design? Are you need to get early-payment discounts with your suppliers?

Try to negotiate for more favorable payment terms with your vendors. Whatever actions you pursue, ideally, you’ll want to have sufficient reserves to cover roughly six months’ worth of expenses.

The problem: Inaccurate pricing

An individual sale does not necessarily mean positive cash flow. For example, if the item or service is not appropriately priced to account for all related expenses — along with a profit margin — you could be losing money. Admittedly, some businesses will take a hit on a small ticket or baseline offerings with an eye on recouping these losses with later, large ticket or add-on purchases. But if these losses are unintentional — such as increased shipping costs or energy use — increased sales may result in a shrinking bank account.

Similarly, poor credit terms can prove equally damaging to your cash reserve. If you’re charging too little interest or offering generous repayment timelines, you’re leaving more of your company’s value in customers’ hands rather than your own.

The solution: Nuanced analytics

If you’re worried about undercharging for your goods or services, you should see what your competitors are doing. You should also perform an accounts receivable analysis and a detailed evaluation of the costs for the raw materials, energy, and labor used in your day-to-day business operations. You can more easily adapt to net a profit with a clearer understanding of your spending. And depending on what you find, it might be time to raise your prices.

The problem: Rapid growth

It may seem counterintuitive, but being too successful can be problematic as anemic growth or shrinkage. For instance, quickly expanding into a new region or market will likely demand significant, up-front investments. And while this increased market capture might denote overall health, pursuing too many of these expansions simultaneously could leave your business with insufficient reserves to handle a market downturn.

Similarly, with increased sales, you’ll have a proportional increase in the material and personnel costs needed to handle these higher volumes. However, given that the incoming payments for these outgoing shipments likely won’t happen for the next 30, 60, or 90 days, it’s possible to hit negative cash flow despite your “success.” And if your expenses begin to exceed your working capital, you could be facing major financial harm.

The solution: Predictive forecasting

Beyond using analytics to understand what is currently happening with your business, you should invest in forecasting software to better predict what will happen with your business. The right tools can digest your business data to identify patterns beyond human perception, providing new insights. And these types of solutions can prove particularly useful during periods of growth, helping to track and forecast potential demand or cost increases that you may not foresee arising from the ongoing success.

Improve your A/R processes with Invoiced

Just as water should flow through a stream, cash should regularly move in and out of business; if there are problems upstream, available funds might dry up completely, and if there are downstream challenges, all manner of collateral damage might occur due to poor outflow.

No matter the economy’s current health or the size of your cash reserves, it’s always wise to look for opportunities to rein in unnecessary expenses and drive greater productivity from your existing resources. And automation—particularly accounts receivable automation—can help you achieve those tasks. 

Invoiced’s Accounts Receivable Automation Software can help your business accelerate and boost the accuracy of internal operations, promote better communication with and simplify the payment process for your customers, and so much more.

Ready to learn how automated A/R can capture your revenue streams more effectively and timely? Schedule a demo or create a free account today!

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