Cash flow management is an invaluable skill that plays a key role in ensuring any business successfully remains afloat. Despite this, all business owners will have periods where cash flow management is not as easy as it could be. Having a tried and tested solution for these times will help ensure your business does not suffer.

Market analysts CB Insights found when conducting failed business research that 38% of respondents listed “running out of cash” as the primary reason for closing. Lack of cash flow can become a significant problem, so understanding the main issues and how to avoid them is vital.

Problem one: Lack of financial visibility and literacy

Full visibility of your organization’s cash flow is critical for managing it more effectively. Once you make the decision to run a business it is vital you work on your financial literacy and expand your knowledge, even if you find this challenging. You can get expert advice and guidance but having a base knowledge of how your cash flow operates is essential to avoid it becoming a problem in the future.

Having a running cash flow forecast allows you to track changes in your business cash flow and understand income versus expenditure fully. A complete forecast will ensure you have a full picture of how much money is coming into and going out of your business and when. You can run forecasts over any given period, with an annual cash flow being the most common but weekly and monthly forecasts can also be useful to keep a close track of your cash and manage your business effectively.

Problem two: Long payment cycles and late payments

According to a survey by cloud business management solutions provider Sage, more than 30% of SMBs based in the US have experienced late invoice payments and this can significantly affect business operations and the ability to manage cash flow effectively. In some industries, you can see that bills not paid for several months mean that businesses are left struggling in a cash drought while they await payment.

There is a range of solutions for these problems including motivating early payment, such as a small discount for settling invoices within seven or 10 days. This should only be offered in addition to consistent and firm payment terms so your clients understand the payment terms fully and recognize the benefits of paying early.

Opting for additional credit lines can be of great assistance to help manage those periods when you’re waiting for payments. A business credit card, when used responsibly, can help you to maintain momentum while waiting for invoices to be settled and give you the breathing space necessary to work through payment delays with clients.

“Small businesses often face gaps between their outgoing expenses and incoming revenue due to seasonal fluctuations or customers delaying payment. A business credit card can help bridge this gap by offering a flexible line of credit to cover short-term expenses. This ensures the business can pay suppliers on time and avoid any interruption to business operations.”

David Luck, Founder and CEO of Capital on Tap

Problem three: Excess inventory

Companies that manufacture or sell physical goods need to have sensible and effective warehouse management processes in place. Keeping too much inventory in stock may artificially inflate your storage costs and mean you have more of your cash reserves tied up than necessary. Avoiding this problem is easier with optimized production and stock management processes, utilizing the latest technologies and experienced warehouse personnel. If you harness the latest technologies to forecast stock requirements you can ensure you only hold as much as you need.

Problem four: Rapid growth

Seeing growth as a problem may seem contradictory, but if your business is not set up to grow at an accelerated speed, you can quickly find cash flow becomes a problem. Quickly expanding into a new market or region will lead to a demand for immediate investment that you may not instantly be able to cover.

Increased market capture is usually viewed as a positive, but if your cash flow cannot keep up with demand then you may need to rethink your approach to ensure you have the cash reserves you need. Rather than finding out too late that your business wasn’t set up for this rapid growth period, be prepared and utilize predictive forecasting.

Predictive forecasting means taking your cash flow forecasts and analyzing them so you can accurately predict the cash flow necessary to expand in the future. If you are hoping to move into a new market, go back to your forecasts and use your existing figures to predict where your reserves need to be, before making that next move.

Problem five: Payment fraud

Payment fraud takes many forms and is more common than many business owners realize. Phishing and cybercrime are common types of payment fraud your business might face and there are also other issues such as chargebacks and fraudulent transactions which can be tricky and time-consuming to reclaim. Cybersecurity firm Tessian reports that US employees receive an average of 14 emails per year that prompt and encourage them to take fraudulent actions.

The risk to your business cash flow is high if employees engage with just one of these emails. The fast-changing nature of fraud means you need to be proactive to avoid falling victim to this type of crime. Utilizing a verified payment processor for online transactions and having strict fraud protection policies for employees can help to limit the risk of fraud impacting your cash flow. Using a business credit card can also help to minimize the risk of falling victim to fraudulent vendors or suppliers.

Conclusion

Understanding and educating yourself and key stakeholders within your business on the key problems that can affect your cash flow is crucial. This will ensure you know how to protect your business from financial difficulty and sets you up for success, with sufficient reserves and working capital to take calculated business risks to generate growth.