What you’ll learn:

  • What cash flow is and why it matters for small businesses
  • Common cash flow problems and how to avoid them 
  • How to improve cash flow and grow your business 

Small business owners and freelancers have unique financial challenges—managing overhead costs like payroll and even investing in future growth can be difficult when you don’t have large sums of consistent cash coming in the door. Unfortunately, many small businesses encounter cash flow issues that can threaten their very existence. In fact, 82% of business failures stem from poor cash flow management.

Here’s how to strike a balance that sets your business up for success. 

What is Cash Flow?

Cash flow refers to money movement—specifically, the way it moves into and out of your business. A healthy cash flow means you have enough liquid assets to cover short-term expenses, like rent and utilities. Cashflow is a critical factor for any business; it affects everything from inventory to payroll.

There are two types of cash flow: positive and negative. Positive cash flow happens when your revenue exceeds your expenses, giving you extra money to reinvest in your business. Negative cash flow occurs when your expenses are greater than your revenue, meaning you don’t have enough money to cover basic costs.

For example, let’s say you sell software. If each sale brings in $1,000 and it only costs $500 to create each unit, you’re in a good position to experience overall positive cash flow.

However, if you decide to ramp up production or hire more expensive developers, your expenses can easily outstrip your profits, leading to a negative cash flow overall.

The Effects of Cash Flow Problems

Maintaining a strong cash flow isn’t easy, especially as your business expands. Simple errors like hiring too many people or overspending on inventory can throw off your company’s finances.

If your business starts to experience negative cash flow, detrimental effects often follow. For one, you may be unable to cover basic expenses like rent or utilities. This can put you at risk of defaulting on loans or getting evicted from your office space.

Negative cash flow can also prevent you from investing in the future of your business. If you’re unable to purchase new inventory or invest in marketing, it will be difficult to grow your company. You may even have to lay off employees, which can further hurt your chances of success.

By understanding the actual mechanics of poor cash flow, you’ll be better able to spot early warning signs and take practical steps to course correct. 

8 Common Cash Flow Problems

Problem #1: Little to No Reserves

If you don’t have enough money saved up, it can be difficult to cover unexpected expenses or take advantage of opportunities when they arise. This is one of the most common cash flow problems small businesses face.

The Solution

A good rule of thumb is to save enough money to cover three to six months of operating costs. This will give you a cushion to fall back on in case of an emergency.

Even when things are tough, setting aside a little money to help during unexpected dips will pay off. If you’re already feeling the pinch of low reserves, you may have to adopt a more aggressive savings plan.

Problem #2: Expensive Debts

Borrowing money can be helpful when you’re short on cash, but it can also lead to problems down the road. If you take out a loan with a high interest rate, you could end up paying back much more than you borrowed. This can put a strain on your finances and make it difficult to cover other expenses.

The Solution

If you need to borrow money, try to get a business loan with a low interest rate. You should also only borrow as much as you need. Taking out more than you need will just put unnecessary stress on your business, even with a lower interest rate. 

If you need cash quickly, explore alternative methods like receivable financing. Hopscotch Flow gives freelancers and small businesses early access to outstanding invoices. Even if a client hasn’t paid yet, you can unlock funds instantly and put that money to work on your timeline. 

Problem #3:  High Overhead Costs

Overhead costs are the expenses associated with running your business, such as rent, utilities, insurance, and payroll. They can add up quickly, especially if you don’t plan properly or you have unnecessarily high bills.

The Solution

One way to solve this problem is to renegotiate your leases and recurring expenses. If you’re paying too much for rent or office space, see if you can get a lower rate. You should also try to negotiate better rates with your suppliers.

Another option is to downsize your office space or get rid of unnecessary expenses. For example, if you have a subscription service that you don’t use often, cancel it.

Problem #4: Inaccurate Forecasting

If you don’t have a clear understanding of your finances, it can be difficult to forecast your cash flow. This can lead to major problems down the road.

For instance, if you overestimate the next quarter’s sales, you might buy too much inventory and deplete your cash reserves.

The Solution

The best way to avoid this problem is to create a budget. Track all of your income and expenses so you have a clear idea of where your money is going and can make more informed decisions about how to allocate your resources.

You should also create financial projections for the upcoming year. This will give you a better idea of what to expect regarding revenue and expenses.

If you find out that your forecast is inaccurate, try to take steps to fix the problem immediately. And make sure you go through the data to see exactly where you went wrong.

Problem #5: Unexpected Growth

While it’s always good to see your business grow, faster-than-expected growth can lead to cash flow problems. If you’re not careful, you could find yourself in over your head.

For example, if you suddenly have a lot of new customers or clients, you might need to buy more inventory or hire additional staff. The extra expense might put a strain on your finances.

The Solution

If you’re experiencing rapid growth, it’s essential to plan. Try to anticipate what your needs will be and make sure you have the resources in place to meet them.

In addition, consider scaling back your operations if necessary. It’s better to slow down and make sure you can handle the growth than to try to keep up and end up in financial trouble.

If you operate a service-based business, it can be helpful to negotiate a signing fee into your payment terms with new clients. That way you aren’t stuck waiting for cash until a project is complete. If you and your client can agree to a 50% signing fee upfront, and 50% at the end of the project,  it can help mitigate cash flow growing pains.

Problem #5: Improper Pricing

Pricing is one of the most important aspects of running a business. If you price your products or services too low, you might not be able to make a profit. And if you price them too high, you could lose customers or be priced out of business.

The Solution

Before you set your prices, research what other businesses in your industry charge. You should also consider the cost of goods sold and how much it costs on average to run your type of business. Once you have this information, you can confidently set prices that will allow you to make a profit.

It’s also important to review your prices regularly. As costs change, so should your prices. By regularly evaluating your pricing strategy, you can be sure you’re always making a profit.

Problem #7: Late-paying clients

Your finances can probably survive one late payment from a customer. But 10? 20? When your clients don’t pay on time, it can throw off your budget and cause major issues with your finances.

This can include things like not being able to pay your bills on time or not being able to meet your obligations with other clients.

The Solution

There are a few things you can do to deal with this issue. First, you should send reminders to clients who are behind on their payments. This will help them remember that they need to pay you and might encourage them to do so promptly. (With Hopscotch, you can send payment reminders in just a couple clicks; plus, your clients have the option to set up recurring payments.)

You can also offer discounts for early payments so clients have an incentive to pay you on time.

Problem #8: Disorganization

Many small businesses are run by a single person or a small team. The setup can lead to disorganization, as you may lack the staff to properly monitor your cash flow.

For example, if you offer clients multiple payment terms, you might have trouble keeping track of exactly how much you’re owed or when each invoice is due.

The Solution

Here’s what you can do to fix this problem. The most important step is to create a system for tracking your invoices. This will help you make sure you’re getting paid on time.

Fortunately, you don’t have to work from scratch. There are many professional accounting software systems that you can adopt. 

More Ways to Solve Cash Flow Problems

Diagnosing what’s behind your cash flow problems can take time. While you’re figuring out what’s wrong, there are several general cash flow solutions you can try. These include:

  • Reducing costs
  • Adopting simpler payment terms or methods
  • Implement a robust plan to deal with late payments
  • Partner with companies that help you streamline operations

Taking these steps can help get your business’ cash flow back into a healthy state.

Boost your cash flow success with Hopscotch

Learn how Hopscotch can make accepting & sending payments easier for your business and create an account today to experience instant, fee-free payments.