The InvoiceSherpa Blog

How Do Cash Flow Problems Usually Start?

Cash flow hiccups have the potential to strangle the vitality out of any business, turning optimistic trajectories into an alarming state of uncertainty. 

Entrepreneurs often find themselves blindsided by these monetary whirlwinds, wondering - how do cash flow problems usually start? Where did we go wrong?

Whether you’re currently in the midst of a cash flow conundrum or you’re trying to be proactive in preventing these issues from arising, you’ve come to the right place.

While the root causes of cash flow problems are varied, understanding them is the first step to safeguarding your enterprise. We’re going to highlight the most common causes of cash flow problems below.

More importantly, we’ll shine a light on proactive strategies, including our solution that empowers you to stay ahead of a cash flow crisis and enjoy peace of mind. 

A Brief Overview of Cash Flow

Cash flow is an indicator that monitors the health and vitality of an enterprise. It represents the movement of money into and out of a business. 

Ideally, your business would be cash flow positive - it brings in more cash every month than it spends, leaving you with a surplus. This isn’t always the case though. Let’s pull the curtain back even further:

However, cash flow is not just a simple matter of profit and loss. Even profitable businesses can face cash flow challenges if they don't manage their money efficiently. 

For example, if customers delay payments, a business might struggle to pay its immediate bills despite expecting substantial income in the future. That being said, how do cash flow problems usually start?

How Do Cash Flow Problems Usually Start?

So, how do cash flow problems usually start? By the time you realize your cash flow management process is askew you’ve likely been contributing towards this position for some time. There are 9 common causes of cash flow problems that we’ll unpack below.

Mismanagement of Accounts Receivable

Accounts receivable represents the money owed to a company for goods or services that have been delivered or provided. This incoming cash flow is predictable and steady when managed efficiently. 

However, poor management of accounts receivable is a leading cause of cash flow problems. Extended credit terms, unclear payment expectations, and inadequate follow-up on overdue payments can cause significant delays in collecting owed amounts.

Furthermore, when clients are consistently tardy or default on payments, it disrupts your cash inflow, making it challenging to meet business expenses. We have a guide to calculating accounts receivable the right way that we encourage you to save for future reading. For now, let’s look at another common culprit of cash flow challenges. 

Excessive or Ill-Timed Expenditure

While it's tempting to invest in that new piece of equipment or embark on an ambitious marketing campaign, untimely or unwarranted spending can result in a severe cash drain. 

Overspending without a clear ROI, or spending heavily without ensuring adequate cash reserves, can create a discrepancy between outflows and inflows. 

Not matching expenses with income, or not deferring significant expenditures until high revenue periods, can place a business in a precarious cash position.

Failure to Anticipate Seasonal Cash Flow Fluctuations

Many businesses experience cyclical patterns, with periods of high sales followed by lulls. For instance, a retailer might see spikes during the holiday season, while a landscaping business might boom in the spring and summer. 

Failing to anticipate these seasonal fluctuations can lead to cash flow issues. A business may find itself strapped for cash during leaner months if it doesn't set aside surplus funds during peak seasons or doesn't diversify its offerings to stabilize income across the year.

Speaking of surplus funds, let’s look at another cause of cash flow problems…not setting up an emergency cash fund for moments like this!

Not Having a Buffer or Emergency Fund

One of the core tenets of prudent financial management is preparing for the unexpected. Just as individuals are often advised to keep three to six months' worth of expenses in an emergency fund, businesses too should have a financial buffer. 

This fund acts as a cushion against unforeseen expenses, whether it's a sudden equipment failure, an urgent repair, or an unexpected downturn in sales. 

Businesses can find themselves scrambling without this safety net. You end up worrying about how you’re going to cover basic operational costs, leading to potential debt accumulation or even insolvency in severe cases.

Poor Financial Forecasting and Planning

If we had to just provide a single answer to - how do cash flow problems usually start? - it would be poor financial forecasting and planning.

Navigating the financial waters of business without a map is akin to sailing a ship blindfolded. Financial forecasting and planning provide this map, allowing businesses to predict income, allocate resources, and plan for future expenditures. 

Failure to forecast can lead to spending based on overly optimistic projections, leaving a business vulnerable when those projections don't materialize. 

Moreover, a business might miss opportunities to invest in growth without proper planning. Similarly, they might not be prepared for routine large expenditures, such as tax payments or inventory purchases.

Unexpected External Factors

Even the best-laid plans can go awry due to circumstances beyond a business's control. Economic recessions, global pandemics, natural disasters, or abrupt regulatory changes can all drastically impact cash flow. 

While it's impossible to predict every external curveball, not staying informed or having a plan for potential large-scale disruptions can exacerbate their impact. 

Failing to diversify suppliers, not having a plan B for distribution, or not staying updated on industry and economic news can leave a business vulnerable to external shocks, leading to severe cash flow challenges.

High Interest Rates

Borrowing money is often necessary, especially for startups or expanding companies. However, interest rates can be a double-edged sword. 

High interest rates mean that your repayments are steeper, taking away a significant chunk from your cash reserves. What's more, interest rates can creep up in fluctuating economic climates and make existing loans or credit lines more expensive.

This can quickly escalate into a full-blown cash flow problem for businesses already skating on thin ice financially. It's crucial to stay informed about prevailing rates and negotiate the best terms when taking out loans.

Drop in Sales and/or Profits

A company's cash flow is directly linked to its sales and profits. Any significant or sustained drop can ring alarm bells for the health of the cash flow. 

Various factors can cause this decline: changing market trends, increased competition, or external economic events. 

Sometimes, it's internal issues like a failed product launch or poor marketing strategies. The ripple effect of reduced sales and profits can be felt in every corner of the business, especially when it comes to paying bills, salaries, and other operational costs.

Rapid, Uncontrolled Growth

Paradoxical as it may sound, growing too fast can be just as dangerous as not growing at all. Rapid, uncontrolled growth often requires significant outlays of cash for hiring, inventory, equipment, and more. 

Cash flow problems can surface if this growth is not matched with a corresponding and timely increase in revenue. It's a classic case of overextension: too many resources are tied up, and there's not enough liquidity to cover short-term expenses

Therefore, while expansion and scaling up are commendable, they should be approached with a meticulous plan ensuring that growth doesn't outpace your cash inflow

Knowing How Cash Flow Problems Start, Harness the Power of InvoiceSherpa to Proactively Prevent Them!

So, how do cash flow problems usually start? In the simplest of terms, this is the result of poor financial planning and management. This is ultimately what leads many small and mid-sized businesses to consider accounts receivable outsourcing.

But, what if we told you that there was actually a better approach to keeping your cash flow in check? The benefits of AR automation are just a click away at InvoiceSherpa: the most trusted accounts receivable automation software in the industry! 

We’ve developed a software that helps you monitor your cash flow and get paid faster - while saving time, stress, and money on traditional approaches. 

You can integrate the software with your accounting platform (Quickbooks, Clio, or Xero) and set up custom invoices with regularly scheduled reminders for clients. You can also set up payment terms, automatic billing, and more.

You’ll have access to an intuitive dashboard that doesn’t just show you the state of your cash flow - it helps you optimize it to fuel future business goals and prevent cash flow problems from rearing their ugly head.

It takes just a few moments to get set up and you can try it out free for 14 days. Those who have taken a chance on InvoiceSherpa see a 25% reduction in past-due receivables, 20% lower days sales outstanding, and a 15% reduction in bad debt reserves.

So, what are you waiting for? It’s time to stop stressing about the common causes of cash flow problems. Leverage the power of InvoiceSherpa and enjoy peace of mind knowing you’re on the right track to achieve any business goals you have!

Wrapping Up Our Guide to the Causes of Cash Flow Problems

The importance of cash flow management cannot be overstated. Cash flow is your key to not just keeping your company afloat, but steering the ship in the right direction towards your goals.

So, how do cash flow problems usually start? It can be anything from not capturing payments in time to poor financial forecasting.

Whatever your causes of cash flow problems may be, one thing is for sure: InvoiceSherpa can help you get back on track if you’re currently in a state of disarray.

That being said, don't wait for a rainy day. Start your proactive journey now and experience the transformative power of InvoiceSherpa with our free trial.

Posted on October 2, 2023

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