12 Most Common Business Cash Flow Problems and Solutions

Non-Recourse Factoring as a Cash Flow Solution to Cash Flow Problems

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. Bankers Factoring, a leader in accounts receivable factoring and PO Funding, helps businesses needing working capital through our quick and easy application process.

Please read our article on the six causes of business cash flow problems that create common cash flow challenges. Poor cash flow management can ruin your company’s financial health.

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 problems with better cash flow management and decision-making. Turn negative cash flow into positive cash flow with this cash flow tips to improve cash flow.

1. Limited Cash Savings or Reserve Funds

Most small businesses survive month to month without sufficient savings for emergencies. Sometimes, 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. However, 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.

Solution

First, you must create a cash flow forecast to budget and build cash reserves for your small business. The cash flow analysis considers all operating expenses and other obligations. The typical monthly cash burn 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 used unless authorized by a designated controller.

Each small 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 because of business growth, and the cash inflows to cash outflows mismatch.

Your marketing strategies part of the business plan must include your day’s sales outstanding or DSO.

Solution

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.

Solution

If your revenues cannot meet the debt’s cost, refinancing the loan can help lower the monthly payments. Refinancing provides a new loan with more advantageous terms for the borrower by extending the payment period, reducing the interest rate, or both.

Alternatively, using debt consolidation can be an efficient solution if you have multiple mca loans. 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 to fix cash flow problems.

4. High Fixed Costs (Overhead)

Fixed costs are business expenses unrelated to selling and delivering products and services. Sales-related costs are operating expenses such as materials, labor, and marketing.  High overhead costs are 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.

Solution

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 expose the company to further risk by evaluating your expenses, then make the change. Tracking your budget and variances is essential to planning regularly to improve cash flow.

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, which your business is not selling, ties up cash flow and critical floor space.

Causes of surplus inventory include:

• Inadequate forecasting methods
• Poor purchasing decisions, such as overbuying
• Product lifecycle
• Lack of knowledge about seasonal industry trends
• Complex supply chains

Solution

Improve inventory management by developing multiple vendors to 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.

Solution

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. Documenting the processes and procedures necessary to keep up-to-date books is essential.

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.

Solution

Management should review financial statements as often as possible, whether daily, weekly, or monthly. The timeliness of 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, reviewing accounts payable and receivable aging summaries and bank statements with reconciliation is vital.

8. Poor Sales Forecast

In an effort to increase sales, businesses increase 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.

Solution

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
• Don’t miss out on growth opportunities by using invoice factoring to fund slow paying A/R.

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

Solution

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 small 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.

Here is an article on inventory financing options for 2025.

Solution

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.

Solution

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 their 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 consistently lose on gross profit margins.

Solution

The solution is to conduct a margin analysis on your products and services with all-in costs. Without up-to-date gross margins and figures for the costs of goods, 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”

An imbalance in cash flow inflows and outflows can kill your small business. Non-recourse invoice factoring can smooth out cash flow challenges and even boost cash flow. It can also add permanent working capital to your business to improve cash flow and give you healthy cash flow. Cash flow solutions happen every week with factoring advances and payment processing from Bankers.

Cash flow issues and struggles are severe problems for small business owners. We understand the struggle of not having the money 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.

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.

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