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What is business cash flow?
The term “cash flow” describes the movement of cash in and out of a business. Many enterprises have cash moving in and out of various accounts: in, through revenue or sales, and out, through expenses.
In the ideal situation, you'll have more cash coming in than leaving your business. That means you have positive cash flow. Negative cash flow, on the other hand, means more cash is going out than coming in.
Cash flow is different from profit. After you’ve paid your taxes, vendors, suppliers, and any other bills, the money left over is profit. Maintaining a positive cash flow could come in handy when facing unforeseen expenses.
Why is cash flow important for a business?
Cash flow is important for businesses because it determines how easily you’re able to meet your current financial obligations and how well you’re able to plan for the future. For example, during stable periods you might set aside some cash into reserves to act as a safety net in case an economic slowdown affects your business. Positive cash flow could make it easier to handle a temporary crisis, such as an unexpected expense or the delayed payment of invoices.
A business with negative cash flow may run into numerous issues, especially if negative cash flow persists over the long term. Some of the most common small business cash flow problems include:
- Falling behind or defaulting on debt obligations
- Inability to pay basic operating expenses or cover payroll
- Difficulty obtaining access to capital through loans or lines of credit (if you’ve already defaulted on some obligations)
- Limited ability to grow your business
In a worst-case scenario, ongoing cash flow problems could trigger the failure of the business. However, identifying and managing small business cash flow problems before they escalate could help you avert a business crisis.
How do cash flow problems usually start?
Small businesses may encounter cash flow problems throughout their life cycle when there’s a change in revenues or expenses. It is especially important to be mindful of potential cash flow problems occurring when small businesses are trying to establish themselves and grow in their early stages. For instance, you might underestimate the costs of launching your business or how quickly it will take for the company to begin turning a profit.
An unexpected event, such as a global pandemic, could also lead to cash flow issues. When an unexpected event impacts an entire industry or creates a new expense, not preparing in advance could leave a small business vulnerable to cash flow issues.
A lengthy production process could also trigger common business cash flow problems. If your money is tied up in inventory, for instance, you can’t use it to pay vendors. Some businesses with long cash flow cycles must go through extra preparation to ensure they can maintain positive cash flow while they’re waiting for their return on investment.
What are the most common causes of business cash flow problems?
Cash flow problems could affect virtually any type of business, including start-ups, small businesses, and enterprise operations. In terms of the most common drivers of cash flow issues, here are some of the key things to watch for:
Unchecked expenses or expense creep
Failing to keep track of expenses could lead to cash flow problems if you’re unknowingly spending more than you’re bringing in. For instance, common recurring expenses include rent for retail locations or office space, production and shipping costs, employee payroll, and insurance payments. Expense creep occurs when your expense categories stay the same but your spending increases in those categories, which could be a side effect of inflation.
Slow- or late-paying clients
Clients who fail to pay on time may cause cash flow hiccups if you’re counting on the money to arrive by a certain date. If you don’t have a collection process in place, you could spend valuable time and energy chasing down payments.
Changes in demand
Cash flow problems could plague businesses that experience higher revenues during certain periods of the year due to seasonality. For example, you might see sales peak around the holidays, then slump in January.
Trying to grow too quickly
If business growth outpaces your cash flow, you could rack up deficits and have trouble balancing the books.
How to solve cash flow problems
Generally, the best way to avoid small business cash flow problems is to implement a plan that might include these strategies.
Get access to capital using a line of credit
A business line of credit* could provide access to capital you need, allowing you to draw against it as needed to cover operating expenses or unexpected costs. For example, you could write checks from your credit line to pay suppliers or cover a surprise equipment repair.
Using a business line of credit for short-term financing may help avoid the need to dip into your personal financial resources or stretch your cash flow when important business opportunities arise.
When comparing financing solutions like small business loans and lines of credit, you might want to consider things like:
- How much you can borrow
- Interest rates and fees
- How quickly you can get funding
- Repayment terms and conditions
Create a cash flow budget
Creating a cash flow budget could help you to plan for potential cash flow problems and solutions for handling them. A cash flow budget is simply a budget for your business’ projected cash flow over a set period of time. You might plan your budget by month, by quarter, or year, depending on how far out you’d like to forecast.
Your budget could be integrated into a broader cash flow management system. Some of the key items to consider for cash flow management include:
- Monthly expenses
- Revenue sources and the seasonality of those revenues
- The amount in reserves
- Inventory management
- Invoicing and collection policies
- Access to capital and credit
- Pricing and profit margins
- Short- and long-term business goals
At its core, cash flow management is all about tracking the flow of money in and out of the business. The goal is to optimize cash flow as much as possible so that you’re making the most of the money you have coming in.
Enhance the invoicing process
Invoicing might be one of the most tedious aspects of running a small business but it’s not a task you can avoid. Creating a smoother process for invoicing may help to resolve business cash flow problems by ensuring that your clients pay on time.
Some of the ways to encourage faster payments include:
- Sending out invoices more quickly
- Following a regular invoicing schedule
- Offering clients faster, more efficient ways to pay
- Sending regular payment reminders
- Extending a discount to customers who pay early
While you’re updating your invoicing process, you might consider reviewing individual client contracts.
Reduce expenses
Lowering and managing recurring expenses could help address cash flow problems in your business. The less your business spends, the more cash flow should improve.
Finding ways to reduce or eliminate spending means going through your expenses carefully to better understand exactly where your money is going. In a sense, it’s not that different from fine-tuning your personal budget.
For example, when reviewing your cash flow budget consider what you’re spending on:
- Rent or lease payments
- Utilities
- Payroll
- Inventory
- Supplies
- Taxes
- Insurance
- Credit card and payment processing fees
- Bank fees
- Accounting software
- Advertising
- Shipping
- Subscription services
- Travel
- Employee perks
Next, consider which of those expenses you could reduce or eliminate. For example, some small business owners have the option to refinance existing small business loans to get a better rate or lower your monthly payments. Or you might consider changing insurance companies in order to reduce your premiums.
The more creative you get with cutting expenses, the more money you could add back into your business cash flow.
Automate your cash flow management
The more of your business process you automate, the more time and money you might be able to save. For example, some of the things you could set on autopilot include:
- Invoicing
- Sending of payment reminders
- Bill payments to suppliers or vendors
- Processing receivables
- Cash flow forecasting
These are things you could potentially manage through your bank or accounting software. You could also use cash flow analytics tools** to view your business’s entire cash flow picture in one place.
Getting a handle on cash flow
Cash flow problems may impact your ability to keep your business going or plan your next phase of growth. The good news is that managing cash flow doesn’t have to be time-consuming or stressful. By implementing some basic systems and strategies, you could better position your business to avoid or reduce small business cash flow problems.
Here is more information on how to grow your small business and learn more about managing your cash flow with American Express Business Blueprint.
FAQs
What is an example of a business with cash flow problems?
Consider a growing small business that sells beauty products. The business owner successfully drives revenue from online sales and decides to open a brick-and-mortar location. To do so, however, they take on new expenses, including rent and utilities for the retail space, payroll for in-store employees, and marketing for their big opening. While online sales remain strong and in-store sales add revenue, this cash isn't enough to cover all of the new expenses. As a result, the business owner experiences negative cash flow and looks for solutions to continue growing their business.
How do you improve cash flow in a small business?
There are many ways to improve small business cash flow problems. You might consider opening a business line of credit to help cover short-term costs and emergency expenses. You might find ways to cut back on unnecessary or hefty expenses. You might also create a cash flow budget to better managing recurring expenses and plan for future cash flow problems and solutions.
*This text includes a link to an American Express product page. American Express offers the American Express Business Line of Credit, and you can click here to learn more. Note that the American Express Business Line of Credit may have different features and terms from the lending products that are discussed above in this article.
**This text includes a link to an American Express product page. Please note, there may be material differences between the product descriptions contained in this article and the American Express products found on linked pages.
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