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Causes of Cash Flow Problems and How to Solve Them ( Infographics )

Establishing your small business is exciting, particularly when you market the products and services you have conceptualized for many months to consumers. But as wonderful as it is to see your offered commodities being bought by your customers, you need to understand that this is not the only business activity that makes your enterprise stay in business in the long term.

Cash flow management is a critical business task that can keep your business running. A healthy cash flow lets you pay your employees’ wages and allocate enough money to pay business operation and overhead expenses. Consequently, poor management of your business cash flow can cause your enterprise to fail.

Here are some common causes of cash flow problems and the ways to solve them:

Causes of Cash Flow Problems and How to Solve Them

Limited or No Cash Reserve

Cash reserve refers to the emergency fund that your business has to meet unplanned or short-term financial needs. Having limited or no cash reserve can cause cash flow problems to your business when faced with high overhead expenses. This can happen when costs related to your business’s daily operation, such as rent, utilities, and insurance, are relatively higher than your sales volume.

How to solve it?

To prevent cash flow problems caused by large expenses, you can allocate resources to build your business’s cash reserve fund. You must ensure that you regularly check on your cash reserve fund and deposit a portion of your revenue to ensure that you have enough reserve of cash to cover contingencies.

Late Payments

Late payment is one of the most common causes of cash flow problems. When a customer misses a payment deadline or has a long net repayment term, you can experience a gap in your cash flow. This may prevent you from meeting your business’s commitments – payments to your employees and creditors, and continue to provide quality services.

How to solve it?

There are several ways to solve this cash flow problem:

(1) enforce firm due dates as well as penalties for late payments;

(2) improve payment terms by offering a discount to customers who process quick repayments of invoices; and,

(3) invest in an invoice maker software program to help keep track of invoices and streamline the process of sending invoices and receiving payments.

Declining Profit Margins

Although earning profit is not enough to keep your enterprise afloat, it can still help in maintaining a healthy cash flow. Declining sales or profit margins can negatively affect your business’s cash flow. It can cause you to fall short in covering business costs.

A decline in sales may be driven by high direct costs, increased competition with local and international competitors, or weakening economic conditions.

How to solve it?

You must examine your gross profit margin and pricing model periodically. It will help you see if your products’ prices reflect the competitive pricing in the market and ensure that your prices are not too low or too high to cause your business to run at a loss.

Consequently, to avoid profitability and cash flow problems, you also must invest in profit-making opportunities like launching new products or services and increasing your traffic by offering discounts and deals.

Poor Financial Planning

Poor planning of business finances is among the most unnecessary causes of cash flow issues. Failure to produce a well-detailed business plan and budget can bring disadvantages to your enterprise, including a shortage in cash reserve funds that may effectively help in cases of cash flow shortages.

How to solve it?

The main solution to this is to create a detailed financial forecast, plan, and budget, enabling you to foresee potential cash flow issues and ensure a disciplined financial approach in case they occur.

Improving your business’s bookkeeping and accounting processes can help you better manage, track, and forecast your finances. Hence, it can enable you to produce a financial budget effectively. You can leverage software tools like business accounting software that have features that can simplify and optimize your financial management capabilities.

Grow Your Business with KIPPIN

KIPPIN – from the phrase “Keeping it simple” – aims to make people’s lives easier by providing simple solutions to everyday tasks. We offer accounting, bookkeeping, invoicing, and tax services – all on the cloud. We also align our clients to top bookkeepers and accountants on our platform.

Email us today at [email protected], chat with us from our website at www.kippinitsimple.com/contact/, or call us at 1-905-581-9362, so we can help you grow your business.