Cash Flow Challenges that SMBs Face

Managing cash flow is one of the most difficult parts of running a small business. The challenge is only getting greater in the current economic climate, with rising costs and high-interest rates. So, whether you’re thinking of starting a business or you’re in the thick of it, trying to maintain a positive cash flow, it is crucial to understand the challenges you face and the potential consequences for your business.

What Is Cash Flow?

First things first, let’s define what is cash flow. The term refers to cash, or cash equivalents, coming in and out of your company over a period of time. If the amount of money coming in is greater than the amount leaving, your business is said to have a positive cash flow. The opposite is referred to as a negative cash flow. However, cash flow is not a direct measure of profit as it considers more than just earnings, including loans or investments. Therefore, it is possible to have a positive cash flow even if you’re spending more than you earn. 

Conversely, it’s possible to have a negative cash flow while running a profitable business. For example, a B2B company offering services on credit or a retail company offering ‘buy now, pay later’ may be left with a negative cash flow as incoming funds are pushed to a later date.

The Importance of Cash Flow

You can have a great business model and massive potential for the future, but at the end of the day, you will always need cash to keep the lights on. A positive cash flow means you can pay all your outgoings while maintaining extra funds. This additional money could go into an emergency fund to plan for an unplanned expense or be used to expand and grow your business.

Positive cash flow gives you the resilience to survive uncertain times and the potential to take advantage of new opportunities.

Conversely, negative cash flow can be highly problematic for your business. While you may be able to operate for short periods with negative cash flow, the disparity between the money leaving the business and the money coming in will eventually become too great. Businesses quickly become unsustainable as they miss payments, which often leads to incurring penalties or losing services, going into debt, and adding repayments that only deepen cash flow problems.

To ensure your business isn’t overcome by cash flow issues, it’s important to understand the challenges you face in today’s market. Listed below are four cash flow challenges to be aware of right now.

1. High-interest Rates

Consumer inflation is causing high-interest rates that pose significant challenges to SMBs’ cash flow, including:

  • Higher borrowing costs: Businesses with variable-rate loans have higher repayments when interest rates go up. 
  • Less access to credit: Businesses looking for credit can struggle to secure loans during times of high interest as banks become stricter on who they are willing to lend to.
  • Lower profit margin: As interest expenses on debt increase, businesses can be left with shrinking profit margins.
  • Reduced consumer demand: Less profit often leads to raising prices, pushing away consumers at a time when they are also feeling the pinch and have less disposable income on hand.

While high-interest rates can be a significant challenge, it is not all doom and gloom. Businesses with cash saved up will receive higher interest, and typically a federal funds rate increase boosts the dollar’s value relative to other currencies. This can be a significant help for SMBs that import goods from abroad.

2. Higher Energy & Gas Prices

The last year has seen a hike in energy and gas prices across the US. This affects cash flow, with utility bills going through the roof. The increased outlay either eats into profit margins or gets passed on to customers. However, when everyone is spending more on essentials, many customers will struggle to swallow a price increase – instead, choosing to cut down their spending or seek a cheaper alternative.

There is no easy answer to dealing with higher energy and gas prices. Businesses that can, must find ways to minimize the impact. This could mean adapting operations to be more energy efficient or increasing work from home to reduce energy use in the office.

3. Late Payments

Difficult economic periods bring with them an increase in late or missed payments. Cash flow problems from slow receivables can cause problems for businesses needing to pay their own bills.

To protect against late payments, businesses need to be careful who they choose to offer credit to. Companies also need to implement a robust accounts receivable process with accurate invoicing, reminders of payment, and penalties for late fees.

4. Supply Chain Chaos

The pandemic created supply chain chaos all around the world, with vendors struggling to fulfill their orders on time. While the problem is improving, issues remain, and many companies are struggling to get the supplies they need on time. Supply chain delays have a knock-on effect, with the next business in the chain unable to put out their product as usual or provide their services on time. This can mean waiting longer for payment or even losing customers, reducing overall income.

Businesses can no longer rely on a single supplier and think everything will be alright. They have to build robust supply chains with reliable partners and local alternatives in the event of a problem.

Managing Your Cash Flow for Success

Managing SMB cash flow is a challenge at the best of times. A tough economic outlook can make it extremely difficult. But there are ways businesses can stay ahead of the game to help maintain a positive cash flow. These include:

  • Keeping an accurate cash flow forecast to track upcoming accounts payable and receivable.
  • Making it as easy as possible to get paid. This includes accurate and prompt invoicing as well as offering multiple payment options.
  • Taking the time to analyze your expenses, cutting any bloat or unnecessary expenditure and hunting around for the best deals.
  • While it may feel like wasted capital, building up a cash reserve during the good times can go a long way to riding out difficult periods.

Following these four tips and understanding the challenges you face are great starting points for successful cash flow management. 

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