According to a report1 released earlier this year by Dun & Bradstreet and Pepperdine Graziadio School of Business and Management, more small and medium-sized businesses in the United States faced working capital challenges in the three months prior to the report than during any period in the last five years. Sixty-six percent of businesses reported working capital as the reason for seeking financing – a figure higher than any other time in the five years since these annual reports started.
In the WePay SMB & Money Survey2, 59 percent of small business owners who indicated they have suffered from cash flow problems reported that the financial impact on their businesses is "consequential" or "highly consequential."
Why do businesses have cash flow challenges, and what can be done to overcome them? We'll look at some examples below.
Many businesses simply have slow periods in which the cash just doesn't flow like it normally does. This could be for a variety of reasons, but it's particularly common with seasonal businesses.
What to do
Simply put, you need to manage expectations and adjust accordingly. The National Federation of Independent Business3 spoke with Jeff Naeem, owner of Junk-A-Haulics, a junk removal business, about this very issue. He told the NFIB, “We manage this cash flow issue by projecting our fixed expenses that we have to pay all year round, as well as forecasting our likely variable expenses. Once we figure out the potential shortfall in our slower seasons, we then dedicate an account that we focus on filling with the target amount of money that we might need. We keep it separate from our operating account so that we don’t spend carelessly, thinking we have more money than we do. For our busy season, we ramp up staffing, but we focus on hiring part-timers so that when the slower season inevitably comes, we don’t have to let people go; we can simply reduce their hours.”
Not foreseeing expenses
Another part of managing expectations is considering potential expenses. Unforeseen expenses can be a big cash flow issue.
What to do
Look back at your company's history of expenses to help you project future ones. Pay close attention to your inventory and equipment for starters. Are you stocked according to projected needs? If not, set up a schedule to make sure you have enough cash to buy stock before it’s required. Will any of your equipment need replacing or upgrading in the near-term? If so, start setting aside the funds in a separate account so you’ll be prepared when it’s time to repair or replace the equipment.
Late payments are one of the toughest cash flow issues to solve, and are unfortunately one of the most common. They're a major inconvenience when it comes to bookkeeping, but for some businesses, they're simply lethal.
What to do
You may not be able to completely eliminate late payments, but you can focus on things that you can actually control.3 Consider getting legal assistance with your invoice template to make sure it has all the right language, and make sure penalties for late payments are clearly spelled out. Bill customers promptly, and follow up frequently until payment is received.
No solution for accounts receivable
Perhaps somewhat surprisingly, many businesses aren't using any kind of software to help them manage accounts receivable. That can mean making mistakes and not staying on top of payments the way you should.
What to do
Luckily, the solution to this issue is relatively easy. Get the software and use it. Look at reviews for different products and determine which is right for your business, and then use it regularly to track accounts receivable.
According to the WePay survey, payment fraud is a major issue for small businesses. One-fourth of owners faced disputed or fraudulent transactions in the year prior – transactions that the owners ended up paying for.
What to do
You can help protect your business from fraud by checking IDs when customers use credit cards and using tokenization (chip-enabled cards).4 If you do business online, prioritize network security, collect as much information during transactions as possible, and log how many times a credit card number is entered online. If multiple attempts to enter a number are made, there may be fraudulent activity going on, and the transaction can be blocked.
If you need help solving your cash flow problems, consider looking into a business line of credit from Nevada State Bank. A revolving line of credit can provide flexibility and the ability to draw funds for business purchases as you need to or help you get through tough periods. Your credit can be replenished with each repayment.
3. Click here for a Two Cents blog article on solutions to this problem.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.