Cash flow for a business is important but it does come with plenty of problems. Cash flow problems can happen to any business at any time and when they are not managed properly or addressed, they can be detrimental. According to statistics, over 80 percent of businesses fail do so because of cash flow management problems.
Reasons Your Business Can Experience Cash Flow Problems
There are numerous reasons why a business might experience cash flow problems, however the following are often considered the most common ones.
Slow season can obviously lower your revenue even if expenses do not follow such as payroll, utilities and more. 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.
It is common for sales to fluctuate but they are habitually inconsistent budgeting, planning, and managing expenses can become challenge and even a small misstep can create a significant cash flow problem.
Economic Downturns and Industry Disruptions
When consumers face economic hardships, business can suffer as purchases are limited to essentials only. Natural disasters, recalls, and product shortages also can affect the inventory and supplies which makes it hard to effectively provide products or services.
Unexpected Equipment Replacements and Repairs
Small pieces of equipment can be easily dealt with but large pieces such as HVAC systems, refrigerator, or construction equipment breaks, business can come to a stop. It might come a large price tag to get the operations going again.
How Can You Can Reduce Cash Flow Problems
Create an emergency cash budget if you have not done so yet. An emergency fund is a great way to handle cash flow problems because you will rely on your own financial resources to manage expected or unrequested cash flow problems.
This requires you to save up a lot of money and it can be hard and take a long time, especially if you are not high enough to build a cash reserve or if you are in the early stages of business.
Try Relaying on Invoice Factoring
Some businesses, particularly those that bill customers or clients, may be able to rely on unpaid invoices to secure funds. 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.
Utilize a Merchant Cash Advance
Business owners can access funding in exchange for a percentage of their credit and debit card sales, plus the lender’s fees with a merchant cash advance. They often result in quick funding and may be an option for business owners who do not have good credit.
There are some problems that come with having a merchant cash advance. 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. Additionally, MCAs often have much higher fees when compared with traditional loans.
Reduce Your Expenses
Though there are costs that are associated with running a business, it is easy to fall into unnecessary debt obligations. If you anticipate cash flow issues, it is important to review your expenditures and eliminate those that are not absolutely necessary to operations. For some, this is possible, but for others, particularly those who are already operating on the bare necessities, budgeting and trimming expenses is not an option.
The Bottom Line
There are many reasons why cash flow problems can occur, and they can either be unexpected or expected. There are a variety of options to help prevent this type of problem and ways to address. It. For some business owners, it might be acquiring temporary financing while other might just need to review their current operational needs and adjust to create a more efficient budget.