Positive cash flow is what keeps your business moving. With positive cash flow, a business has enough liquid cash to cover its liabilities. Cash flow problems become negative cash flow when a company’s outflow exceeds its cash inflow. These problems threaten businesses globally and result from macroeconomic issues, like natural disasters, recessions, and wars, to microeconomic issues like your business decisions, performance, and other factors. 

Planning for cash flow problems can empower you to cushion—or even avoid—financial blows to your business. Let’s look at some common cash flow issues and how cash flow management and sound accounting practices can help you manage your money.

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1. Lack of cash reserves

To protect your business in case of a drop in revenue, it can be helpful to have enough cash reserves to cover up to six months of expenses. While putting aside that much cash may seem difficult, pinpointing exactly how much you need can inspire you to save more and eliminate unnecessary costs.

Lack of cash reserves solution  

Project your cash flow by estimating your sales, determining when you can expect payments, and estimating all expenses (fixed and variable). This system can give you a figure to aim for as you build a cash reserve. 

Once you know how much cash you need in your reserves, you can begin building an emergency fund. QuickBooks can help you automate cash flow projections so you know where you stand financially. 

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2. Expensive borrowing

Debt payments can cause cash flow problems when a business can’t afford its financing. Paying off business loans and high-interest credit cards can take much of a business’s revenue.

Solutions for expensive borrowing

Payment solutions like supplier financing can help businesses improve cash flow and avoid additional debt. Refinancing loans to secure lower payments or debt consolidation may also help make borrowing more manageable. Term loans with low interest rates from QuickBooks can also help improve cash flow.

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3. Decreasing sales or profit margins

Selling products and services for too little can result in low profit margins. Similar problems can arise when sales teams offer discounts that cut into profit margins. There are plenty of money-saving ideas that you can use in the short- and long-term to improve profit margins.

Solutions for managing decreasing sales or profit margins

Create a short-term business survival plan and pricing strategy. Reviewing expenses and pricing let small business owners determine if they should adjust prices or discontinue products or services with weak margins.

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4. Outstanding receivables

Late payments on invoices can cause cash flow problems for small businesses. When outstanding receivables are tying up your money, it can leave your business in a poor cash position. 

Outstanding receivables solution

Review payment terms and collection policies to speed up accounts receivable. You can get money coming in faster if you: 

• Send invoices earlier.
• Review your billing cycle and payment terms.
• Break up payments into project-based weekly or biweekly installments.
• Request payments from past-due accounts.
• Ask for a deposit or partial payment upfront.
• Encourage or incentivize early payments.
• Accept multiple payment methods.
• Improve cash flow with invoice financing.
• Consider selling your debt through invoice factoring.

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5. Uncontrolled business growth

Cash flow mistakes are common during high-growth phases. Cash flow shortfalls can come from over-forecasting growth and when expenses exceed working capital. If you’re in a high-growth period, it’s critical to recognize the difference between profit and cash flow. 

Uncontrolled business growth solution 

Look for ways to slow down and prioritize getting your finances in order. If you grow too quickly, tracking and learning to manage cash flow can become much more difficult. Try implementing new accounting measures for a clearer picture of your financial situation.

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6. Too much inventory or seasonal changes in demand

Overinvesting in inventory can leave businesses in a pinch if sales don’t cover investment costs. Monitoring inventory can help them avoid overstocking and running out of key products. 

Many businesses experience seasonal fluctuations in demand. If business owners don’t account for these changes, they can lead to less-than-ideal cash flow situations. 

Solutions for too much inventory or seasonal demand changes

Business owners should consider using an inventory management system to balance their inventory. Keeping inventory on hand for the shortest time possible can keep inventory from contributing to cash flow shortages. Cash flow projections and accurate sales forecasting can help small business owners plan for seasonal changes.

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7. Inaccurate forecasting or bookkeeping practices

It can be relatively straightforward to keep track of business cash flow and forecast sales. But as a business grows, cash management may become more complex. If you don’t know exactly how much you have coming in and going out, it will be difficult to accurately forecast what you’ll need in the future, let alone understand what you’re dealing with.

Inaccurate forecasting or bookkeeping practices solution

Consider getting help with your bookkeeping. A professional accountant or bookkeeping service can help find and eliminate accounting mistakes. They may also be able to look at your historical cash flow and tell you where you went wrong and how to create more accurate projections in the future.

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Other cash flow solutions

Cash flow problems can threaten your business’s health, whether you’re self-employed or a small business owner with employees. Fortunately, you can use these tactics to help tackle common cash flow problems.

Reduce and negotiate your expenses

Reducing or negotiating expenses is a smart way to encourage positive cash flow. With more working capital, you can prioritize expenses and prevent cash flow problems from spiraling out of control. 

Depending on your circumstances, a few creative changes may help get you back to positive cash flow.

• Discontinue nonessential services temporarily.
• Expand virtual services.
• Cancel or reduce premium services.
• Move to a lower-cost supplier temporarily.
• Reduce operating costs.

Looking for methods to reduce operating expenses isn’t easy, but it will bring essential and non-essential expenses into the spotlight. 

Create a short-term business survival plan 

For small business success, examine your business plan, processes, operations, income, and expenses. If your business works on a per-project basis, use job costing to review your business’s profit and loss statements and margins. Identify the lion’s share of expenses and profits in products, services, clients, and labor. 

Understanding this information can give you an accurate cash flow projection under normal circumstances. It can also help you predict how scaling back will affect your business. 

Consider borrowing options

Borrowing money is another way to balance your cash flow. Ideally, you opened lines of business credit when your finances were in a better place. But if that isn’t the case, ask your current financial service provider what they can offer before turning to other lenders.

Although short-term loans can seem like a lifeline when you’re experiencing problems with cash flow, there are caveats. First, you’ll need to have a documented business plan and cash flow forecast to show lenders. Second, interest rates and other terms and conditions can have lasting consequences. So read the fine print before borrowing. Finally, if there’s an internal flaw in your business, a fresh injection of cash won’t solve cash flow problems, it will only delay them.

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Choose the best payment setup for your business

Remember, negative cash flow doesn’t necessarily mean that a business has a cash flow problem. It’s common for a business to have negative cash flow after making large payments or experiencing seasonal business fluctuations. Cash flow only becomes a problem when there isn’t enough cash coming in to cover outflow.

Spend some time looking at your cash flow problems and solutions and consider finding ways to make things clearer so you have a better understanding of your cash flow at any given time. Consider new accounting software that can track net cash flow and many other factors related to your business’s financial standing. Explore plans to see the many ways QuickBooks can help you stay in control of your business finances. 

This article originally appeared on the Quickbooks Resource Center and was syndicated by MediaFeed.org.

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