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7 common business cashflow problems
Issues your business might be facing — and how to fix them.
Low cash flow accounted for 25% of business closures in 2015, according to a study conducted by the Small Business Administration (SBA). Here we've listed some of the common issues your business may struggle with, and what you can do to solve them before they put you under.
Low profit margins
Making a profit isn't necessarily enough to keep your business afloat. If your profit margins are low, it will affect your overall profit margin and cause difficulty. Cashflow issues can arise when you need to cover a bill, expand or pay an expense — so, small profits can cause you to fall short in covering your business costs.
How to fix it
Maintain a tight control on your books and financial statements. Regular reviews and consultations with a financial specialist can help you understand your costs and profit, which will in turn help make your business more efficient. You should also review the cost of your goods to ensure your price point reflects the market and your services.
Large overhead expenses
Equipment costs, rent and tech can all eat away at your bottom line — and make your business's cash flow dry up. If your business is spending too much money on the expenses that don't directly drive profit, you may find that you don't have the cash to handle unexpected expenses or opportunities.
How to fix it
Regularly review your expenses and cut where you can. For example, if your business or office space is efficient, it might be time to change locations. Maybe you have unused equipment you can sell. Eliminate any wasteful or unnecessary expenses to lower your overhead and help free up cash to save your business money.
If a client doesn't pay on time or has a long net repayment term, it will limit your business's cash flow. Without regular payments, your business will need to rely on expensive short-term options — like invoice financing — to make ends meet between when a job is completed and when you get paid.
How to fix it
There are several options here. Improving your collection methods and offering a discount on the invoice for a quick repayment are two common methods to keep turnaround time down. If a project has multiple steps, send invoices at each stage to avoid going months without payment. Invoice-processing software and accepting electronic invoices will also help speed up payment time and improve your cash flow.
Unsold inventory can be major a drain on your business's cash flow. And if your stock depreciates in value — or is never sold — your business may end up with a loss that further damages your revenue.
How to fix it
If you can, slash inventory prices or offer discounts to your customers to recoup sales. In the future, avoid purchasing stock items until you have a confirmed sale, or keep a lean inventory to avoid tying up cash in product that isn't moving.
Low seasonal demand
If your sales fluctuate seasonally — for instance, you sell a much higher volume of goods leading up to Christmas and see a huge drop in sales after the holidays — you may experience cashflow issues at certain times throughout the year. While this isn't uncommon, it can make it more difficult to cover expenses during lulls, which could put your business at risk.
How to fix it
The best way to counter low seasonal demand is to build up a cash reserve to cover expenses during the off season. However, you may also want to look into short-term business loans to act as working capital when you aren't making enough — provided your business is able to handle daily or weekly repayments.
Loans are a necessary part of doing business, but high interest rates mean higher payments, which suck up your business's cash flow.
How to fix it
Analyze your loans and payment scenario. If you're able, consider consolidating some of your or all of your debts into one loan to help lower your monthly payment — you may even score a more competitive APR. But even if you're paying roughly the same amount, one bill each month — versus a handful of scattered payments — will simplify your bookkeeping.
Limited or no cash reserve
Savings are a critical part of any budget. If your business doesn't have a reserve of cash — or assets that can quickly be liquidated — you may experience a gap in cash flow when faced with large expenses. A cash reserve helps solve other cashflow issues because you won't need to rely on outside financing to make ends meet during seasonal lulls or between invoice payments.
How to fix it
The only solution is to dedicate resources to building your business's cash reserve. Open a high-yield savings account for your business and regularly deposit a portion of your revenue. Much like your personal savings, you should have enough to cover operating expenses or emergencies for a minimum of three months.
4 ways to increase cash flow
Once you identify any cashflow issues, it's important to pick the right product to fix them. Consider these four options when you're trying to keep your business's cash flow in good shape.
1. Business line of credit
A business line of credit is a flexible loan typically for ongoing expenses that can be drawn from as needed. They usually have low variable rates — and you'll only pay interest on the funds your business uses.
This is an efficient way to cover any seasonal or sudden gaps in cash flow. However, you and your business will need to have good to excellent credit in order to qualify for the most competitive offers.
2. Online lenders
Online lenders offer a wide suite of loan options to meet a large selection of business needs. In general, online loans have less strict eligibility criteria than banks. This makes them easier to qualify for and easy to use when your business needs a small influx of cash.
Unfortunately, many online lenders that offer quick turnaround and shorter terms require businesses to make weekly or even daily repayments. If your business is already struggling with insufficient cash flow, this can drain your revenue.
3. Invoice financing
If your business processes a high volume of invoices with long net terms, invoice financing can be a short-term solution. It allows you to use your invoices as collateral for an advance — when your client pays the invoice, the invoice financing company will deduct its fee. Your lender is paid when the invoice is paid, there are no repayments — but you may be on the hook for the advance amount and additional fees if your clients don't pay their bills.
4. Business credit cards
Like personal credit cards, business credit cards are a high-interest option best suited for emergency expenses. There are a variety of cards out there for businesses big and small, and many have rewards systems.
Because of the high rates, your business may be able to get the working capital it needs over the short term. But over the long term, repayments can be another bill that consume your cash flow.
See your business loan options
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Can I negotiate with suppliers and creditors to increase cash flow?
It is possible to negotiate with your creditors and suppliers to increase cash flow over the long term. If your business has previously borrowed money, a creditor may be willing to accept a lower payment if that amount is a decent percentage of the debt owed.
Unfortunately, a creditor may not accept reduced payments while an account is in good standing. Moreover, it could hurt your business's credit score and relationship with the creditor — but you may be able to have the total amount of debt reduced and paid off in a number of months.
The higher monthly payments can put a strain on your business if it's already experiencing cashflow issues. But once the debt is repaid, it can quickly free up cash resources that were otherwise tied up.
Similarly, you may be able to extend payment terms with your supplier or vendor. A personal guarantee or collateral may help sweeten the deal, but it isn't always necessary. Be direct and honest about your needs, and give specific payments dates and amounts to illustrate your plan to repay.
Are grants available to help increase cash flow?
There are grants that can be used to cover expenses — but they can be extremely competitive and difficult to qualify for. Your business will need to meet relatively strict requirements to qualify for federal, state and private business grants.
In most cases, grants are awarded to nonprofits or businesses dedicated to providing helpful services to their communities. And even if your business does qualify, grant competitions are generally run annually. This means you may need to submit an application and wait months to learn if you've won. So while there are options out there, you will likely need to borrow or find an alternative cashflow solution for short-term problems.
Cashflow problems can be an indicator of underlying structural problems. When you analyze your finances and take a hard look at your business's budget, you may find areas to cut — and ways to expand on what's working.
To help improve cash flow in the short term, consider the full range of business loans available.
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