Common methods for solving cash flow problems include identifying the amount of the shortage, understanding the impact it’s having on your company, and determining what sources of income and expenses you can adjust. For example, you might negotiate better terms, refinance debt to a better interest rate, or encourage faster payments from your clients.
We’ve compiled 10 effective methods for solving cash flow problems, so you can get back to being cash flow positive.
1. Identify the Shortage Amount & Its Impact
How Cash Flow Affects Debt Repayment
A cash flow shortage can make it difficult to make payments on existing debt. It can also limit your access to additional capital as lenders and investors aren’t likely to lend additional funds to your company if they see you’re having difficulty making ends meet.
Falling behind on payments due to a cash flow shortage could be even more costly as it could result in late fees. Depending on how late you are on payments, it can also cause your credit score to drop, something that can make it difficult for you to get approved for new loans and affect your ability to get a lender’s best-advertised rates.
How Cash Flow Affects Daily Business Expenses
A cash flow shortage can make it difficult to accomplish day-to-day business tasks. From an internal company perspective, this can impact payroll, health benefits, rent, and more. Externally, it can impact your ability to obtain inventory from your suppliers or maintain third-party expenses like insurance or subscription-based software necessary for business operations.
How Cash Flow Affects Business Growth and Other Investments
Without sufficient cash flow, it can be difficult to invest in the continued growth of your company. Some examples of business growth investments include research and development, marketing and advertising budgets, and real estate purchases.
2. Figure Out the Frequency of Your Cash Flow Shortage
If you’re only short on funds for several months throughout the year, you may need to reallocate funds from higher-earning months to account for the seasonality of your product or service. On the other hand, if you have a shortage regularly, you may need to take a more detailed look at your business income and expenses.
3. Determine How Much Additional Funding You Need
Another method for how to solve cash flow problems involves identifying how much extra funding you need. Cash flow shortages won’t always be noticeable immediately. You can be profitable and operate in the green when it comes to comparing your income to your expenses. However, your business could still have a cash flow issue if it can’t cover expenses to achieve long-term goals.
Knowing exactly how much you need to improve your cash flow will help you make the most of your efforts. You’ll be able to reach your goals faster and avoid the possibility of unnecessarily eliminating expenses that have a positive return on investment.
As mentioned in the previous step, reviewing your business bank statements for the past six to 12 months can give you an idea of your shortage amount. You can review your average month-end balances to determine how much additional funding you need.
4. Reconcile Your Income and Expenses
Understanding Your Income
When it comes to reviewing all of your income sources, be sure to differentiate between when the income is recorded for accounting purposes, as opposed to when you have physical access to the funds.
For example, you may record accounts receivables as income on a financial statement even before you have received payment from your customers. Without physical access to the funds, you wouldn’t be able to resolve any immediate cash flow issues. If this is the case, consider adjusting the terms of your invoices to encourage faster repayment.
Understanding Your Expenses
To get a comprehensive list of business expenses, we recommend reviewing the last 12 months of your business bank statements. If you simply use your business bank account to make payments on business credit lines or credit cards, you can review the corresponding loan statements for details of the charges.
Doing this can make it easier to identify recurring costs and items that are charged less frequently, such as annual insurance premiums or professional licensing fees.
5. Cut Back on Business Expenses
Before reducing or eliminating costs associated with certain business activities, you should consider how they contribute to your company’s bottom line. For example, it may be unwise to eliminate marketing or advertising costs if those items are responsible for bringing in a large portion of revenue.
You can review the last 12 months of your business bank statements for a list of expenses you might be able to eliminate. You can also consider organizing these expenses by category or how often they occur. Since there’s a wide range of business expense categories, we recommend using our worksheet to organize common IRS business expenses.
6. Reduce Business Debt Payments
Ask for Extended Payment Terms
If any of your vendors or suppliers offer you a grace period, you can ask them for more time to make payment in full without incurring any penalties. Some vendors require payment on receipt. But you can ask for terms as long as 30 days to allow your business more time to hold onto funds. Some vendors allow repayment over 90 days.
Request Discounted Pricing
Just like you can offer discounted pricing to encourage faster payments, your suppliers can do the same for you. For example, you can request discounts for being a long-time customer, being a repeat customer, or making payments in an alternative manner.
Refinance Debt to a Lower Interest Rate or Longer Term
When you refinance debt, you’ll often have the ability to choose a lower rate and a different loan term. A lower interest rate can reduce the interest charges you pay over the life of the loan, while a longer loan term can reduce your total monthly payments by spreading the cost over a longer period.
If you decide to refinance debt, don’t forget to account for any origination fees or costs associated with getting a new loan. Also consider the possibility that while a refinance may help in the short term with your cash flow, it could be detrimental in the long run—depending on the total interest charges and loan fees you’ll be paying.
Perform Inventory Control & Management to Reduce Costs
Proper inventory control and management ensure you have the right amount of product to meet customer demand while keeping your costs low. This important step can help maximize profits and reduce waste. Inventory control prevents overstocking in warehouses and stores, while inventory management deals with purchasing material from suppliers.
7. Brainstorm Ways to Increase Revenue
Offer Sales or Temporary Discounts
Reducing prices with a sale could motivate customers to purchase more than they normally would. While this may not be sustainable in the long run, it can be a good option to increase revenue quickly in a short time frame.
Train Staff to Find Opportunities to Sell Additional Products
Additional ways to increase revenue include upselling customers to more premium versions of products or services that may better suit their needs. If your company has complementary offerings, you can also try cross-selling these items to customers.
8. Encourage Faster Payments
Provide Volume Discounts
If you need funds quickly, providing a volume discount on orders can encourage customers to buy more than they need initially. This can give your company a much-needed infusion of funds while allowing your clients to save money in the long run. Volume discounts can also lead to a more loyal customer base, which can yield additional long-term profits for your business.
Offer Discounted Prices for Repeat Customers
To encourage a more stable and consistent source of revenue, you can offer discounts to repeat customers. Discounts can be issued based on the number of orders placed in a specified time frame, or the dollar amount of orders placed. Depending on your company’s product or service, you can also consider offering discounts for customers who agree to sign a contract for a minimum period of time.
Allow Discounts for Automatic Payments
Offering your clients an incentive for automatic payments can ensure not only more consistency as far as when you’ll receive payment, but it can also reduce the likelihood of your customers being delinquent.
Accept More Payment Methods
If your business accepts more forms of payment, it can make it easier for customers to send you funds. Forms of payment you can consider accepting include:
- Credit cards (American Express, Discover, Visa, and Mastercard)
- Peer-to-peer payment methods such as Venmo or Paypal
- Online payments
- Wire transfers
Some forms of payment assess fees, so you’ll want to make sure that the costs you incur from accepting additional forms of payment provide a sufficiently high ROI to justify the added expenses.
Provide Discounts for Cash Payments
To avoid the fees associated with accepting certain payment methods, you can encourage customers to pay with cash by offering a discount. Cash discounting does, however, require business owners to adhere to certain federal regulations. Discounts must be disclosed, transparent, and offered in a non-discriminatory manner to all customers.
Offer Early Payment Discounts & Discourage Late Payments
Offering an early payment discount can encourage customers to pay you faster. But be careful not to issue a discount so big that it cuts into your net profit. In addition to offering early payment discounts, charging late fees can give customers another incentive to pay invoices in a timely manner.
When considering how much to charge for late fees, consider any state or federal regulations that may limit the amount you can charge. Charging too much may land you in trouble from a compliance perspective, leading to additional fines and penalties.
9. Get Additional Funding From Lenders
Get a Short-term Working Capital Loan
You can typically use short-term business loan funds for a variety of business purposes. Some examples include payroll, inventory, rent, utilities, and other daily expenses. Short-term loans can often be issued in as little as one business day, but in exchange, they often carry higher interest rates compared to traditional loans. They also have a short repayment term, usually between several months to three years.
If you want to get a working capital loan, we recommend National Funding, which provides excellent customer service and customized loan options with up to $500,000 in funding. Depending on your business qualifications and loan details, you could also qualify for same-day funding.
Use a Small Business Line of Credit
A small business line of credit gives you the ability to draw funds as needed. It’s a revolving credit line that allows you to draw funds up to the maximum credit limit you’re given, with interest charges only being applied to your outstanding balance. Just like with short-term loans, many small business credit providers allow funds to be used for any business purpose.
Bluevine is a lender we recommend for a small business line of credit. It offers up to $250,000 in funding and repayment terms as long as 12 months. You can also get funded in as little as 24 hours.
Apply for a Small Business Credit Card
With a business credit card, you’ll have a revolving line of credit you can use to make business-related purchases. It is ideal for small or medium expenses, recurring costs, and daily purchases.
Business credit cards give you the option to pay only a small portion of your outstanding balance, although the annual percentage rate (APR) is typically above 20%. As a result, it’s best to pay off the balance in full or within several months if you want to reduce the interest charges.
Many business credit cards also have a rewards program offering cash back or points that can be redeemed for merchandise or travel rewards. We recommend considering the U.S Bank Business Triple Cash Rewards World Elite Mastercard®. It can offer up to 5% cash back on eligible purchases and is currently also offering a 0% intro APR on purchases and balance transfers for 12 billing cycles.
Apply for Personal Loans for Business Purposes
If your business credit is not good enough to get a business loan, personal loans for business purposes can be a good alternative. These loans focus on your personal credit as part of the qualification process. Personal loans can include lines of credit, term loans, and secured loans, such as home equity loans and home equity lines of credit.
If you’re looking for a personal loan for business purposes, consider checking out Upstart. It tops our list of the best personal loans for business funding, offering up to $50,000 in funding in as little as 24 hours.
Access Your Retirement Savings With a Rollover for Business Startups (ROBS)
With a ROBS, you can access your retirement funds tax- and penalty-free. A ROBS is not a loan, so it’s easier to get overall. And it doesn’t have many of the small business loan requirements around minimum credit scores, time in business, or revenue. Rather, one of the few requirements to get a ROBS is to have a minimum balance of around $50,000 in your retirement accounts.
A ROBS is a complex transaction that can result in fines and penalties if done incorrectly, so we recommend using a ROBS provider like Guidant Financial to walk you through the process. The provider has comprehensive legal and audit support services as well as a satisfaction guarantee for its services.
10. Build an Emergency Fund
One last method for how to solve cash flow problems involves having at least six months of operating expenses in a high-yield business savings account. Doing so can protect you from temporary or unexpected fluctuations in income or expenses. You’ll have the ability to quickly withdraw the funds to cover any cash flow shortages or unexpected emergencies.
Frequently Asked Questions (FAQs)
Solving cash flow problems should be done as soon as possible as they can be detrimental to multiple aspects of your business if left unchecked. They can hamper your ability to invest in company growth, result in late fees being assessed if you’re unable to pay debt, and lower your credit score if you are delinquent with creditors.
Yes. A cash flow shortage can be caused by differences such as when a company records a sale versus when it receives payment and has physical access to those funds.
It depends on your circumstances. In general, you can resolve cash flow issues by analyzing your income and expenses. You can find ways to generate more income, encourage faster payment from your clients, or reduce business expenses with a low return on investment.
Bottom Line
Solving cash flow problems can be done in several ways: reducing expenses, applying for funding, and encouraging faster payments. Cash flow issues should be addressed quickly because they can easily spiral out of control.
For instance, having insufficient funds to make debt payments can result in late fees, something that can make it even more difficult to keep your account current. Loan delinquencies can also impact your loan rates and make financing harder to obtain.
