Cash Flow Problems: Common Issues & How To Avoid Them

For any small business owner, tracking financial metrics is a daily reality. You monitor gross sales, profit margins, and marketing return on investment (ROI). But among all the financial data you track, one metric stands above the rest in its impact on your company’s ability to survive as well as thrive: cash flow.

Your business may turn a profit on paper, with plenty of sales and strong profit margins. But if you don’t have enough cash on hand to pay bills, you’re facing serious cash flow issues. For growing companies, where reinvestment in inventory is constant, having a healthy business cash flow isn’t just a goal—it’s the lifeblood of the operation. Read more about common cash flow problems facing small businesses and strategies to solve them.

What is cash flow?

 In simple terms, cash flow is the movement of money going into and out of your business during a specific period of time. Cash inflows are the money coming into your business from sales, financing, or investments. Cash outflows are the money paid to cover operating expenses, inventory, salaries, and other financial obligations.

When inflows exceed outflows, you have positive cash flow, giving you money to cover your costs and reward owners or investors. Conversely, when outflows are greater than inflows, you have negative cash flow. This can cause financial pressures and potentially put your business in danger.

Common cash flow problems

• High overhead costs
• Late payments
• Inventory management issues
• Low profit margins
• Aggressive growth
• Seasonal fluctuations

Cash flow problems occur for a variety of reasons. Recognizing these challenges in the early stages is an important step toward creating a resilient business. Here are a few of the most common cash flow issues that can impair a business’s financial operations.

High overhead costs

Overhead costs are fixed expenses your business incurs regardless of sales volume, including insurance, rent, utilities, and salaries for non-production staff. When these costs are too high relative to revenue, they can drain your cash reserves. This leaves little room to pay for unexpected expenses or to invest in growth opportunities.

Late payments

If you sell on credit, timely customer payments are your company’s lifeline. However, late payments are a frequent source of cash flow shortages. A high volume of outstanding invoices means that although you’ve made sales, the cash isn’t in your business bank account yet. This gap between billing and receiving payment can strain your ability to cover expenses needing immediate payment.

Inventory management issues

For ecommerce businesses, inventory is a major cash expenditure. Buying too much inventory can tie up cash in unsold goods that sit in storage. Buying too little inventory often leads to stockouts or lost sales. Without effective inventory forecasting and control, you could make spending miscalculations that harm your net cash flow.

Low profit margins

Your profit margins can be squeezed if you underpriced your products or services, or your cost of goods sold (COGS) is too high. Even with strong sales, you will generate little cash from each transaction. This also could make it difficult to build a cash cushion and leave your business vulnerable to any increase in operational costs or a dip in sales.

Aggressive growth

Rapid expansion can result in large cash outflows for additional staff, bigger facilities, and increased marketing spend. If this growth siphons off regular cash flow rather than drawing on well-planned financing, it can quickly lead to a cash flow shortfall. Your revenue might increase rapidly, but if you’re spending cash faster than you’re bringing it in, you’re heading for trouble.

Seasonal fluctuations

Many businesses experience peaks and valleys in demand during different seasons. For instance, a clothing retailer might see a huge surge of sales during the holidays but experience a lull in the first quarter. This could make it a challenge to manage cash flow, because you have to cover fixed expenses even during slower times.

How to address cash flow problems

1. Reconcile diligently and track your cash
2. Manage receivables and payables
3. Optimize  inventory to free up cash
4. Build a cash reserve
5. Seek expert guidance and leverage financial tools
6. Explore financing options if needed

Fixing cash flow problems requires a proactive approach to financial management. Here are six best practices for effective cash flow management, incorporating advice from Armine Alajian, CPA and founder of Alajian Group, an accounting firm that focuses on startups and business management.

1. Reconcile diligently and track your cash

The single biggest mistake business owners make is failing to reconcile their financial accounts, such as your business bank account and company records. You can’t manage what you don’t measure, and if you aren’t reconciling, you don’t have an accurate picture of your cash position.

Not reconciling your cash is the most common error Armine says she sees.

“You have this data coming in from different sources,” says Armine.  “And if you don’t reconcile, you don’t know if something is missing, something is overstated, or something has been duplicated.”

Armine suggests making reconciliation a monthly—or even weekly—routine. Beyond your accounting software, she recommends a simple but powerful tool.

“Everybody should also have a cash tracker, just some sort of a tracker to see what’s happening with your cash,” she says.

This can be a simple Excel spreadsheet tracking daily or weekly cash inflows and outflows. It can give you a clear, up-to-the-minute view of where you stand financially.

2. Manage receivables and payables

To solve the issue of late payments, you need to streamline your collections process. The longer an invoice goes unpaid, the harder it is to collect. Automating your invoicing and payment reminders is an important step. However, Armine cautions against a set-it-and-forget-it mentality.

“You’ve got to monitor it,” she says. “You can’t just let it do its own thing.”

Armine suggests utilizing accounting software to set up automatic invoicing and follow-up reminders for outstanding receivables. To further encourage prompt payment, consider offering early payment discounts (e.g., a 2% break for invoices paid within 10 days).

For clients with extended payment terms, keep communication channels open and establish a clear process for escalating overdue invoices. The goal is to reduce the time it takes to convert a sale into cash in the bank.

Extending your accounts payable can often improve cash flow. For instance, if payment to a vendor is due in 30 days, rather than pay it on day one you could schedule the payment closer to the due date. This helps to keep cash in your business longer. You could also try negotiating with your vendors for longer payment terms (e.g., from net 30 days to net 60), which can provide more breathing room for your cash flow.

3. Optimize inventory to free up cash

For businesses selling products, inventory is one of the biggest factors in business cash flow. Diligent inventory management ensures your cash is working for you, not tied up in goods sitting idle on warehouse shelves.

Inventory management often is a complex activity, and Armine recommends seeking specialized solutions.

“Inventory is a little bit more challenging,” she says. “Just like payroll, find a company that does that specifically and then connect it to QuickBooks and have a system to reconcile.”

You can use inventory management software for tracking stock levels, sales velocity, and lead times for suppliers, among other things. This data will let you make better purchasing decisions so that you don’t tie up cash in slow-moving products. Implementing systems such as just-in-time (JIT) inventory can minimize the amount of stock you hold, or use ABC analysis to prioritize high-value items.

4. Build a cash reserve

An emergency fund is not a luxury; it’s a necessity. It’s a safety net to help your business withstand unexpected expenses or a sudden drop in revenue without going into debt. 

How much should you save? 

“I think six months,” Armine says. “But cash is so tight for everyone, especially for entrepreneurs, because they’re risk takers. So if you know how much cash is coming in, how much cash is going out, then you’ll know what you need, cash wise, monthly.”

You can start by setting up an automatic transfer to a high-yield business savings account every week or month. Even a small percentage of your revenue can add up over time. This reserve can cover operating expenses like rent and paying employees during a downturn.

5. Seek expert guidance and leverage financial tools

As a business owner, your time is best spent on activities generating revenue. Becoming overwhelmed by complex bookkeeping can lead to unnecessary stress and costly mistakes.

“Have a system, have a budget, have a projection, and track it,” Armine advises.

And you don’t have to do it alone.

“Accountants are your friends,” she says. “Hire someone who knows what they’re doing.”

Consider investing in accounting software like QuickBooks or Xero to serve as the central hub for your financial statements. And, as Armine suggests, consider hiring a qualified bookkeeper or accountant. They can help you set up your systems, create an accurate cash flow forecast, manage taxes, and provide the objective insights you need to maintain your company’s financial health.

When using a general ledger system that brings in data from other sources (such as Gusto for payroll and Shopify for ecommerce sales), Armine emphasizes the importance of ensuring that it’s integrated with your other systems.

6. Explore financing options if needed

Sometimes, despite the best strategic planning, you may face a cash flow crunch. In these situations, a short-term loan can provide the liquid cash needed to fund new marketing strategies, seize a growth opportunity, or bridge a seasonal lull.

For businesses using the Shopify platform, Shopify Capital is an integrated option that takes a percentage of daily sales to repay the cash advance and cover fixed fees.

“When you have sales, they offer you capital,” she says. “It makes it easy for the owner.”

Although it’s convenient, she encourages business owners to understand the additional costs of financing options before using them.

Before taking on any debt, create a detailed plan for how you will use the funds and how the investment will generate more money to cover the loan and its interest payments. Evaluate all options, from traditional bank business lines of credit versus loans to alternative lending options. Choose the one aligned with your business goals and repayment capacity.