Common Cash Flow Problems for Small Business Owners
Non-Recourse Factoring as a Cash Flow Solution
Table of contents
- Non-Recourse Factoring as a Cash Flow Solution
- 1. Limited Cash Savings or Reserve Funds
- 2. Late Paying Customers
- 3. High-cost MCA Debt
- 4. High Fixed Costs (Overhead)
- 5. Surplus or Dead Inventory
- 6. Poor Accounting Practices
- 7. Lack of Financial Analysis
- 8. Poor Sales Forecast
- 9. Inventory Shrinkage
- 10. Seasonal Business Trends
- 11. Excessive Bad Debt
- 12. Poor Gross Margins
- Ready for the owner-employees of Bankers Factoring to solve your cash flow problem with non-recourse factoring? Call 866-598-4295 or go to Bankers-Factoring-Application.
Is your company running out of cash? Most businesses experience cash flow issues as their revenue fluctuates based on the time of year. Fortunately, the correct planning and financing strategy can identify cash flow problems. Thus, Bankers Factoring, the leader in accounts receivable factoring and PO Funding helps businesses lacking working capital through our quick and easy application process.
Please read our article on the six causes of business cash flow problems.
If your business is experiencing cash flow issues, your average accounts payable cycle is less than your average accounts receivable cycle. Fortunately, we have identified the twelve most common causes of cash flow problems and solutions for each. So here are actions a business might take when experiencing cash flow problems.
You can also read our shorter article on six tips to improve business cash flow and improve your cash flow management.
1. Limited Cash Savings or Reserve Funds
Most businesses survive month to month without sufficient savings for emergencies. In some cases, the company may not have any reserve funds – this is a severe problem.
In addition, businesses with inadequate cash reserves are the most common cause of cash flow constraints. But with sufficient cash reserves, businesses can withstand short-term headwinds and sustain operations. Thus, striving for short-term assets to exceed short-term liabilities is ideal.
You must first create a cash flow forecast to budget and build cash reserves for your business. The cash flow analysis considers all operating expenses and other obligations. The typical cash burn monthly is the foundation for determining your cash reserve goal.
Next, to accumulate sufficient cash reserves, create a plan to allocate percentages of revenue in a separate account. This requires extreme discipline, planning, and oversight to reach the liquidity goal. This particular account is not to be unless authorized by a designated controller.
Each business and industry is different but having the liquidity to cover three months of expenses is a sufficient starting point. The quick ratio, or acid test, measures short-term liquidity by how well a company can pay its current liabilities without selling inventory or additional financing. A measure above “one” indicates the company has sufficient cash in the short term.
2. Late Paying Customers
Slow-paying invoices constitute a significant cause of cash flow shortages. 30 days was the norm, but now big companies pay little companies 60-90 days out. So if your company has commercial customers with extended payment terms, then your company may wait up to 90 days for payment. This also depends on whether the customer even pays on time. While your company is waiting for payment, the gap in your receivables and payables continues to increase, causing more cash flow issues.
High-growth companies are in even worse cash flow shape.
Two options to overcome untimely payments are offering cash discounts or invoice factoring.
- Cash discount: offering customers a 2% discount in exchange for payment within 10 days is an effective solution to speed up invoice payments.
- Invoice Factoring: offers businesses immediate cash in exchange for their customer invoices. Contact Bankers Factoring to learn more about our leading invoice factoring solutions from one of the top non-recourse factoring companies.
3. High-cost MCA Debt
Recurring high debt payments each day or week can cause cash flow problems due to high-interest rates and large principal amounts. You may have also experienced these types of debt if you have taken on merchant cash advances, high-interest loans, credit card debt, and other expensive loans.
If your revenues cannot meet the cost of the debt, then refinancing the loan can help lower the monthly payments. Refinancing provides a new loan with terms more advantageous for the borrower by extending the payment period or reducing the interest rate, or both.
Alternatively, if you have multiple loans, utilizing debt consolidation can be an efficient solution. This solution replaces outstanding debts with a new loan and lower monthly payments.
Turning your total open Accounts Receivable into cash via non-recourse invoice factoring is cheaper than swiping a credit card.
4. High Fixed Costs (Overhead)
Fixed costs are business expenses unrelated to selling and delivering products and services. Costs related to sales are operating expenses such as materials, labor, and marketing. High overhead is a problem for cash-strapped businesses.
Examples of fixed overhead include rent, telecommunications, utilities, and insurance. High fixed costs hurt your available cash flow each month as these occur in regular intervals.
If you have not searched for other service providers, start by receiving three new bids for fixed costs. If you can cut costs by changing providers and not exposing the company to further risk by evaluating your expenses, then make the change. It is essential to track your budget and variances to plan regularly for this solution.
5. Surplus or Dead Inventory
As a small business owner, if your company has manufacturing or warehouse distribution operations with the product, then you may have too much inventory sitting dead on shelves. Excess inventory your business is not selling ties up cash flow and critical floor space. Causes of surplus inventory:
- Inadequate forecasting methods
- Poor purchasing decisions, such as overbuying
- Product lifecycle
- Lack of knowledge about seasonal industry trends
- Complex supply chains
Improve inventory management by developing multiple vendors that can meet tight lead time windows. Critical considerations for managing inventory levels include current levels relative to historical sales, sales forecasts, available funds, and supply chain capabilities. Additionally, developing physical and cycle count schedules will help monitor key products before they run out of stock.
If your company re-sells products, you can benefit from Bankers Factoring purchase order financing. Our PO funding programs enable our clients to finance large sales and new clients, typically exceeding their working capital.
6. Poor Accounting Practices
Bookkeeping is frequently not the expertise for business owners who understand their business, industry, and the overall market. Adequate bookkeeping and accurate accounting records require great discipline and timely data entry. This problem can be complex to solve. The timelier your books update, the more efficiently you receive customer payments.
If your books are not up-to-date or your business lacks books altogether, then you cannot track any financial data. A lack of standard accounting procedures will prevent your business from accurately stating income for tax purposes or obtaining traditional financing.
Establish a relationship with a professional firm, CPA, or experienced bookkeeper to bring your books current. The key is moving forward with current accounting records, which require daily upkeep. You can find a bookkeeping solution by outsourcing to a firm, working with an independent contractor, or hiring a full-time bookkeeper. It is essential to document the processes and procedures necessary to keep up-to-date books.
7. Lack of Financial Analysis
Maintaining accurate books is only half of the problem for your business. Many businesses fail to analyze their financial statements regularly. Over 65% of entrepreneurs claimed lack of fiscal management to their business failure. Reviewing your financials can identify potentially problematic cash flows before they occur.
Management should review financial statements as often as possible. This can be daily, weekly, or monthly. The timeliness of your reporting is critical for up-to-date information. Business owners should review the three financial statements: income statement, balance sheet, and cash flow statement. Also, it is vital to review accounts payable and receivable aging summaries and bank statements with reconciliation.
8. Poor Sales Forecast
In efforts for increased sales, businesses grow their capital injection to growth plans. Unfortunately, market demand does not always meet projections, causing businesses to have excess inventory, marketing plans, and payroll expenses. These losses contribute to many businesses’ cash flow problems with commercial customers and extended payment terms.
Businesses miss sales projections at different phases in their business lifecycle. Unforeseen circumstances in the external environment can hurt businesses that are not prepared. Here are some solutions to minimize cash flow shortages from missed sales.
- Have an emergency fund: build cash reserves (#1)
- Utilize temporary or fractional employees for growth plans
- Implement moderate to conservative growth to minimize potential downfalls
- Rent vs. buy: utilize assets as necessary (cost per job) before buying
9. Inventory Shrinkage
Shrinkage is inventory loss from employee theft, customer theft, human error, fraud, or vendor errors that result in a loss of potential sales and profits. Employee theft is a major problem that negatively impacts cash flow in many companies. Examples of employee theft include:
- Falsifying cash receipts and invoices to steal money or product
- Change payment information on invoices
- Utilize payroll as a vehicle to steal money
- Stealing inventory found and not recorded during a physical count
Eliminating shrinkage involves robust internal control and organizational policies. It can be challenging to identify where inventory losses originate. However, these solutions help minimize your shrinkage potential:
- Clearly communicated inventory management policies
- Prescreening employees through a standard procedure
- Internal controls or built-in checks and balances: have at least two employees for all financial transactions
- Facility security cameras with live feed and remote access
- Conduct regular audits and assessments of the security protocols
10. Seasonal Business Trends
Specific industries have seasonal trends due to weather, holidays, times of the year, and local preferences. If your business falls into this category, rigorous cash flow planning is critical to withstand low-season cash problems. Here is an in-depth article about seasonal cash flow issues.
A few standard solutions effectively manage the inconsistent cash flow with seasonal businesses. As we have identified previously, build a cash reserve account to offset the lack of revenue and receivables. Moreover, to establish reserve requirements, effective forecasting is critical to ensure the cash gap is closed. Effective forecasting and planning will allow your reserves to meet your demands. Again, Bankers Factoring stands ready to help you improve your cash flow, increase your bottom line, and expand profit margins by taking discounts and top-line growth.
11. Excessive Bad Debt
If you have sold products or services to a customer who does not pay, you are familiar with bad debt. Bad debt occurs when your customer fails to pay its invoice. This loss of cash hurts your profits and available cash flow. Excessive bad debt has led to many small business failures.
Pre-qualify your customer’s creditworthiness before extending payment terms. You can utilize the same process as Bankers Factoring does by spending $15,000-$30,000 on a credit insurance policy. Provide extended payment terms or periods to only customers who qualify; others must establish their credit before receiving terms. You may lose some sales in the short term, but customers with actual value will stick in the long run.
However, you have to either invest in credit insurance or a credit manager and have working capital equal to 2-3 months of sales. It is easier to let Bankers Factoring take the credit risk and give you 80-90% of your sales upfront with non-recourse factoring as a cash flow solution.
12. Poor Gross Margins
Businesses can fall into the trap of selling their products or services at a loss, with or without knowledge. In competitive markets, the pricing pressures increase, and economies of scale are hard to achieve for smaller businesses. If your company does not handle or manage your costs of goods sold or cost of sales, you will lose on gross margins consistently.
The solution is to conduct a margin analysis on your products and services with all-in costs. Without up-to-date gross margins and costs of goods figures, your business does not know the margin at current prices. You have several options if your business is losing money on specific offerings.
- Raise prices
- Reduce costs
- Take vendor discounts
- Eliminate waste or unnecessary redundancies
- Drop the product or service
- Modify the product or service “recipe”
Cash flow issues and struggles are a severe problem for small business owners. We understand not having the money and needing to pay your employees, rent, finance projects, invest in inventory, and market your company. If you have commercial or government customers with solid invoices, your short and long-term cash flow issues can disappear with the help of Bankers Factoring Business Cash Flow Solutions.