For any small business to be successful, owners must have a solid understanding of how cash is flowing into and out of the company. Unfortunately, capital is one of the biggest headaches small business owners say they face. For example, one survey found that over one-third of small business respondents identified “lack of capital” as the number one reason why the business had to close.[1]
Proper cash flow management involves planning for both incoming and outgoing revenue so that your company always has the money on hand that it needs to run. To do that, though, small business owners and their finance teams need to have a thorough understanding of their current payment processes and debts, as well as a plan for how to handle any potential disruptions in cash flow in the future.
Luckily, most cash flow issues stem from a few common causes. Business owners who understand these will be more likely to avoid them, or at least have a plan for them when they crop up.
Avoiding Emergency Funds
Businesses — like individuals — need to be prepared for the unexpected. Surveys[2] show, though, that 17% of business owners say that if faced with two months of declining revenue they would have to close, and other statistics show that 25% of businesses won’t open again after a disaster.[3]
Small businesses that have emergency funds will be more likely to cover unexpected expenses — like a high tax bill, increase in supply costs or repairs after a disaster, for example — which puts them at an advantage. To build your emergency fund, start by figuring out how much you need (how much money would cover your immediate expenses for one month, for example, and then how many months do you want to have saved), and start putting even a small amount away each month with that goal in mind. Set a reoccurring and automatic schedule so you never forget, and deposit the funds into an account that’s solely for emergency purposes.
In lieu of an emergency fund, small businesses do have other options in a pinch. A line of credit can help cover unexpected expenses, for example, or a loan from the Small Business Administration.
Not Creating a Budget
Budgeting is the first step in getting a real handle on expenses, but in 2021, more than half (54%) of small businesses didn’t have a formally documented one.[4]
Small businesses looking to create a budget should create specific and realistic goals, and overestimating expenses (i.e., expecting to pay more for items this year than you did last) will put you at an advantage. While some small business owners may consider a budget to be limiting, with a properly documented budget in mind, businesses have a financial focus, as well as something to work against when considering what to spend on throughout the year.
Remember that a budget is a moving target, and goals can change frequently and quickly. Be sure to revisit your budget as things change, like as your business expands, for example, or as inflation causes a sharp increase in the cost of goods, and implement a system to properly track all moving parts so you always know where your large expenses are and can adjust accordingly.
Receiving Late Customer Payments
Customers are the lifeblood of any small business. When customers make late payments, those delays can cause real problems. Unfortunately, it’s fairly common for customers to make late payments, with 87% of businesses reporting that they are typically paid after their invoice due date.[5]
Small businesses can make a few small changes to help avoid this issue. Sending invoicing quickly, and accepting multiple payment options, is a good start. It’s also important to clarify payment terms and expectations ahead of service and on every invoice. Asking for a deposit or full payment up front — as well as charging a late payment fee — can also help ensure you get paid for your services.
Uncontrolled Growth
Nearly half of business owners in one survey said they plan to grow their current location, service, or website this year, and another 11% planned on opening an additional location, service, or website.[6]
Growth is generally considered a good thing for small businesses, but when it comes quickly, or without a plan, it can have an adverse impact on a company’s bottom line. As growth occurs, businesses also need to scale up, accordingly. This often means more employees, more and/or better equipment, and maybe even a larger office space or increased shipping expenses.
Every smart business owner should prepare for growth by creating a plan for expenses when it occurs. For example, some ways to pay for expenses related to growth include financing through a bank, applying for a small business loan or, for smaller purchases, perhaps buying things with a business credit card. Each of these options come with pros and cons that will need to be weighed by individual business needs. Doing that research and putting together a plan ahead of time can save valuable time when the growth does, hopefully, come.
Not Paying Yourself a Salary
When your business is strapped or you’re worried about cash, it makes sense that you might avoid paying yourself a salary in order to put more money back into the company. In fact, 26% of small business owners don’t pay themselves a salary, according to a 2022 small business survey.[7]
Experts say this is a mistake for several reasons. Not only does it lead to more stress for you — which may cause you to be distracted from the business — but it also negatively reflects against the health of the business, and could cause big problems come tax time. Instead of going without, do your research and pay yourself appropriately. One survey found that 46% of founders pay themselves less than $100,000 annually,[8] but consultants, entrepreneurs in the same line of work and industry trade groups are all good places to start when you’re considering a fair wage for yourself that accurately reflects how your business is doing.
Cash flow problems can be a big stressor on small businesses, but they also can be avoided by understanding how they usually occur. By implementing some of the suggestions above, you’ll be more likely to keep cash flowing so that you can focus on more important things, like the growth of your company.
