Cash flow problems arise when businesses cannot cover debt payments, payroll expenses, or inventory restocking. Many of these problems are temporary and only pose a serious threat if they become chronic. The first four solutions are types of financing that can be used for quick, and the remaining six are long-term managerial adjustments you can make to avoid future cash flow issues.
On December 27, 2020, the federal government authorized an additional $284.5 billion in funding for the Paycheck Protection Program (PPP). Under this new allocation, PPP loans are available to first-time borrowers as well as businesses that have already received one PPP loan. Similar to prior funding rounds, this allocation will likely be depleted quickly. We recommend submitting an application through Lendio, a broker that has handled—and received funding for—thousands of PPP loans since the program’s inception.
1. Financing: Short-term Business Loans
Short-term loans are easy to get approved for, and lenders can provide funding in as soon as one business day. These loans have a higher annual percentage rate (APR). However, the total cost of capital can be less expensive than longer-term options with a lower APR.
2. Financing: Small Business Lines of Credit
A small business line of credit works like a credit card. Borrowers only pay interest on the outstanding balance, not on the entire available credit line. When business owners pay down their balance, the amount of credit replenishes and is available to borrow again.
3. Financing: Trade Credit From Partners & Suppliers
Another option that business owners have to improve cash flow involves negotiating better invoice payment terms with trade partners. Extending the time a business has to pay a partner—from due on receipt to due in 30 to 90 days—allows the business to hold on to more cash for a longer time.
4. Financing: Other Cash Flow Solutions
Some trade partners will require cash payments. Using a business loan or credit card to make other payments can maximize cash on hand to address cash flow problems. Using available credit is a short-term solution, and it carries an interest rate. Therefore, business owners should always budget for repayment.
5. Managerial: Renegotiate Supplier Contracts
Businesses struggling with cash flow problems need a permanent managerial cash flow solution to increase disposable cash. This is also true if adding revenue doesn’t seem to increase the bottom line. One cause of the cash flow problems might be how much a business is paying suppliers.
An increase in gross profit could mean a substantial increase in disposable income. This isn’t a cash flow solution that brings immediate benefits, but business owners notice the impact of renegotiated contracts within 30 days.
6. Managerial: Improve Invoicing Processes
Business owners that don’t use an accounting system to invoice clients should invest in an accounting solution. They should also automate their invoicing system because both processes can help address cash flow problems by reducing the number of errors, ensuring everyone receives bills on time and providing business owners with a clear snapshot of their cash position.
Benefits of automating an invoicing process include:
- Reduced costly invoicing errors and delays
- Faster invoice delivery to clients
- Increased data clarity and insights
- Reduced effort for past due invoice collections
7. Managerial: Encourage Clients to Pay Faster
Every small business owner with cash flow problems should ask themselves what they can do to make it easier for their clients to pay faster. Providing a method or a reason for clients to pay faster can improve immediate cash flow problems. There are many ways to do this, and businesses can get creative based on their circumstances.
- Set up auto-billing: Signing clients up for an auto-billing cycle where the amount due is drafted from their bank account or charged to a credit card on the same day each month will help make payments predictable.
- Accept online payments: Paying a bill online with a credit card is convenient for clients. If clients can pay online, then they may be more willing to pay the invoice upon receiving it. Keep in mind that accepting credit card payments can come with credit card processing fees.
- Encourage early payment and discourage late payment: Most people are cost-conscious. Clients could be happy to pay more if it means they will get a better deal or discount. Using the right combination of carrots and sticks to ensure a business gets paid on time solves cash flow problems that don’t require financing.
- Let clients choose their payment day: Every business has different revenue cycles. It may be beneficial to some clients to make payments mid-month, while others would prefer to make payments at the beginning of the month. Allowing clients to choose the day that works best for them will incentivize them to pay on time.
8. Managerial: Stretch Out Payables
Stretching out payables means choosing to pay certain bills past their due date. While this can help with short-term working capital, it is not a good long-term solution and can damage relationships with trade partners and hurt personal credit. If businesses stretch out payables, then there are multiple ways to do this while still preserving important vendor relationships.
- Reschedule payments: If a business has too many payments due at a particular part of the month, then consider negotiating a different due date throughout the month with some of these trade partners. Many vendors will be happy to change their payment date if they feel confident in the business’s ability to pay on time.
- Change payment agreement: Many payments are due once per month, but some service providers will allow business owners to pay semi-annually or annually. An annual subscription might be cheaper as some service providers will give discounts for paying this way.
9. Managerial: Reduce Expenses
Reducing expenses is a common approach to trying to fix a cash flow problem. However, it’s easy to go about this the wrong way by cutting big-dollar expenses that hurt a business’s ability to generate revenue. There are other expense-reducing measures that business owners can take to maximize the amount of cash flow the company receives without hurting the business operations.
Business owners should suspend non-essential expenses, like landscaping or pest control to increase cash flow. Businesses should cut anything that is not essential before necessities like inventory, marketing, or labor. Often the vendors that business owners cut will offer discounts to earn back business, which can be great after the business owners resolve cash flow problems.
There are even ways to reduce the costs of services business owners continue to use. Services like phones and the internet can provide cost-saving opportunities. Business owners without a contract can shop around to see if there are cheaper options available for the same service with other providers.
10. Managerial: Monitor and Moderate Growth
Business owners get excited about growth, and for a good reason. Growth means more employees, higher revenue, new opportunities, and personal success. However, unmonitored and unmoderated growth can cause cash flow issues. Business owners should develop the discipline to turn away customers if they are experiencing cash flow shortages.
Unmoderated growth, or overtrading increases future receivables and current expenses for businesses. As expenses outstrip revenue, businesses face cash flow problems. In the short run, business owners may use financing as a cash flow solution. However, repeat overtrading will only compound financial problems and could bring the business down.
There are many ways to solve business cash flow problems. Some solutions involve being smarter about invoicing and getting customers to pay quicker while others involve cutting expenses. Each solution can help with overall cash management and improve a business’s ability to predict how much cash they have on hand.