4 Common Cash Flow Disruptions in Small Businesses (and How to Solve Them)
Source: CO - By U.S. Chamber, Jodi Helmer , Contributor
Cash flow disruptions are widespread and persistent for small businesses, but strategies like digital invoicing, cost control, and cash forecasting can help optimize cash flow.
SaveCash flow disruptions affect 88% of small businesses, but fewer than one-third are taking steps like tracking expenses, streamlining payroll, or digital automation to address them. The problem is both widespread and persistent, according to Jameson Troutman, Head of Product for Small Business at JPMorgan Chase.
“Cash flow is really critical for small business,” he said. “It is foundational to running the business.”
Here are four strategies small businesses can use to optimize cash flow.
1. Streamline customer payments
Small businesses are often waiting on money that should already be in the bank. A QuickBooks survey found that 56% of small businesses are waiting on cash from unpaid invoices and almost half were 30-plus days overdue.
For small businesses with limited cash reserves, even short payment delays can cause a ripple effect. Using digital invoicing and real-time payment tools can accelerate revenue collection.
Accepting multiple forms of payment allows small businesses to balance instant payments with those that take longer to reconcile, said Brian Clarke, Payments Analyst and Deputy Director in the Regional and Community Outreach Department at Federal Reserve Bank of Boston.
2. Change payment terms
Asking suppliers to extend payment timelines from net-30 to net-45 or net-60 terms can help avoid a cash crunch. Asking for early payment discounts when cash flow allows can also offer cost savings.
Troutman believes that building strong relationships with suppliers can open the door to negotiating better terms in exchange for faster payments or other concessions, adding, “It allows you to have a relationship-based discussion verses a transactional discussion.”
Small businesses that shrink their payment terms can also improve cash flow. QuickBooks found that 40% of small businesses that expected payment upon receipt experienced cash flow issues, compared to 60% of small businesses that offered 90-day payment terms.
3. Control costs
Keeping costs in check can leave more cash in the bank. Renegotiating a lease, switching to a more affordable supplier or lowering other fixed costs can optimize cash flow. Cuts should be strategic: Instead of cutting whole categories of spending, Troutman advises scaling back.
“You don't want to shut off marketing for a quarter [because] it could impact your potential growth but maybe you turn off one marketing channel,” he said. “It's about altering your strategy versus trying to completely turn it off.”
4. Plan for big investments
It’s no secret that large expenses can throw cash flow out of balance. Cash forecasting helps small businesses understand when there are likely to be surpluses or shortages of cash to better plan for equipment upgrades or other major expenses.
“Those types of decisions around when you make some of those bigger capital investments are also areas that small businesses will lever to manage cash flow,” Troutman said.
Delaying an investment until revenue is steady can ensure there is enough capital to cover the expense without putting the business into a cash flow crisis.
With the right mix of digital tools, expense strategies, and strong relationships, small businesses can optimize cash flow and stay focused on growth.
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