Cash Flow Problems: 4 Signs to Look For

Cash shortages can cripple small to mid-sized businesses — but solutions like early payment programs can help boost your cash flow before it’s too late.

Poor cash flow — the measure of money going in and out of a business — is one of the leading causes of small business failure. Even if your business is profitable, you could be struggling to maintain working capital if you’re spending money faster than you’re getting paid. Without enough positive cash flow, your business may be unable to cover everyday expenses, fund growth opportunities or stay prepared for rising inflation.

If you only focus on profits as your measure of success, you could be overlooking some key signals that your cash flow is at risk. Here are four signs that you have a cash flow problem and some solutions to increase your working capital.

1. You’re unfamiliar with your cash flow position

Many businesses use profit and loss statements to assess their financial stability. But without immediate access to cash, high sales and profits aren’t enough to support business operations and growth. If you’re not sure how much cash you have on hand, you can’t plan for shortages, let alone grow. This is why monitoring your working capital is so important.

A cash flow forecast — which anticipates the money going in and out of your business over time — enables you to plan for growth or make strategic financial changes like cutbacks. It also shows you when you need cash the most, so you can negotiate shorter payment terms with customers or use solutions such as early payment programs to get cash faster.

Build a monthly or quarterly cash flow forecast to keep tabs on your working capital position. If you’re not confident in your financial skills, hire an accountant to help you create accurate forecasts and review them regularly to inform business decisions. Consider including metrics such as your operating cash flow ratio, free cash flow and days sales outstanding (DSO) to get a clear picture of your cash flow position.

2. Sales are high but your working capital is low

You might already generate forecasts. In this case, a negative or low cash influx is an obvious sign that your cash flow is at risk. This may be combined with high levels of short-term debt to cover hiring, inventory, facilities or other expenses. If this sounds familiar, it could be because your business is growing too quickly. You’re turning a high profit, but long customer payment terms mean that you lack the liquidity to cover growth expenses upfront.

You can address this scenario by growing carefully and establishing a healthy amount of working capital before investing in new opportunities. Consider leasing equipment or property rather than buying it, monitoring your spending closely and avoiding early bill payments so you don’t unnecessarily dip into working capital before you need to. You can also build your working capital by using early payment programs to get faster invoice payments from your customers.

This was the case for Casablanca Foods, a small business that supplies major food retailers such as Costco. Restaurant closures during the COVID-19 pandemic led the business to grow by 50% in the span of a few months, but increased profits didn’t necessarily turn into the working capital it needed to meet demand. C2FO’s Early Payment program enabled the company to free up cash in accounts receivable so the company could increase cash flow and meet requests for more products.

3. Your business isn’t growing

On the other hand, your business might have slowed down due to inflation or other market changes. This usually goes hand in hand with longer payment terms from customers, which also need to increase working capital. You’re unable to maintain reliable cash flow not only because you’re waiting on outstanding invoices but also because sales are low.

This situation may warrant cutting expenses. Use your cash flow forecast to prioritize business expenses and evaluate where to cut back or switch to cheaper alternatives. You can also adjust your inventory or pricing strategy to increase profit margins. To kick-start business growth, consider applying for working capital financing or using short-term financing solutions such as a business credit card or overdraft protection.

Again, early payment programs can prompt faster invoice payments from your customers to increase working capital — and they’re often more cost-effective than traditional financing options. With more working capital or financing in place, you can fund new marketing and sales strategies to increase profits or develop a new offering that meets current market demands.

4. Outstanding invoices are accumulating

Customer payment periods of 30, 60 or 90 days are becoming more common for small to mid-sized businesses as inflation rises. If this is true for your business, you likely have cash flow issues. Try negotiating shorter customer payment terms to address outstanding invoices. Send out your invoices as soon as the product or service is delivered for faster payments. While these are good best practices, they might not be enough to boost your cash flow.

Another solution is to give your customers a small discount for early payment of their invoices using a dynamic discounting provider such as C2FO. Early payment discounts give you faster payments without the timeline or expenses associated with traditional financing options. This accelerates your cash flow and gives you more control over customer payment timelines.

Moving forward

If your business struggles with cash flow, you’re not alone. According to QuickBooks, almost two-thirds of small business owners regularly struggle with cash flow issues. Creating regular cash flow forecasts, applying for financing, monitoring expenses, and adapting your pricing and sales strategies are all valuable long-term solutions to address cash shortages.

However, if you need to increase your cash flow today, you might want to take advantage of nontraditional working capital solutions. If your customers already participate in early payment programs, you can start increasing your cash flow immediately by requesting early payment for any outstanding invoices.

Find out now if any of your customers offer early payment through C2FO’s platform.