A company might be making sales and reporting profits, but not having enough cash to cover wages, rent, and supplier payments can make it difficult for a business, especially startups, to stay afloat. In fact, almost 82% of the businesses failed because they didn’t have proper cash flow practices.
This is especially challenging for early-stage businesses or startups, as they don’t have enough cash saved up and their revenue generation is very unpredictable, but they still have high upfront costs to cover. This article delves into some of the most common cash flow problems businesses encounter and how to spot them early on to avoid further issues.
Common Cash Flow Issues
Some businesses don’t even realize they’re struggling with cash flow until it starts affecting payroll, bills, and their daily operations. Some of the problems that disturb the cash flow are:
1. Delays in Customer Payments
Late payments from customers can really put a lot of pressure on a startup’s cash flow. Service-based businesses or companies handling large projects often have to spend significant resources upfront, but payments might not come in for 60, 90, or even 120 days. That kind of delay impacts businesses by creating a chain reaction, making it harder to cover payroll, pay vendors, and limiting your business from taking on new opportunities. In these situations, startups might have to:
- Borrow and take out expensive short-term loans to cover immediate expenses, but that means interest adds up to an already tight budget.
- Dip into personal savings, which is risky if the gap persists.
- Adjust operations by delaying hires, purchases, or any projects.
This is where cash flow templates can make a real difference in helping you keep track of incoming and outgoing payments, spot gaps before they become a problem, so that you can plan accordingly.
2. Seasonal Sales Fluctuations
Many businesses assume that revenue during their busiest time period is normal, only to run into trouble when these sales drop. This happens in retail during holidays, in B2B during slow months, or for services that depend on weather or trends. It makes businesses overspend during busy periods, and they face cash shortages during slower months.
3. High Operating Costs
High overhead can quickly drain a startup’s cash, especially early on when revenue is unpredictable. Rent, utilities, equipment leases, and software subscriptions have to be paid regardless of income, but taking on expensive office space or premium equipment too soon is what creates financial strain.
Each new hire brings more than salary benefits, workspace, technology, and training, and all that adds to expenses. If these costs rise faster than revenue, cash flow gets tight. This usually happens with tech startups, where keeping up with perks and infrastructure can push the costs beyond what the business can provide.
How to Manage Your Cash Flow
Every business works differently and has its own ways of generating income. That said, there are practical steps that are important to strengthen your cash position and reduce any strain caused by unexpected challenges:
- Keep track of payments by following up with clients regularly.
- Set clear payment terms beforehand so that customers are aware of the terms and conditions.
- Try renting or leasing instead of buying equipment or vehicles to reduce upfront costs.
- You need to have a cash buffer, so you have two or three months’ reserves instead of just one.
Endnote
Running a startup or a business successfully depends heavily on how you’re managing your finances. Keeping track of your cash flow and spotting the abovementioned challenges early on is very crucial for keeping a business running.
Peyman Khosravani is a global blockchain and digital transformation expert with a passion for marketing, futuristic ideas, analytics insights, startup businesses, and effective communications. He has extensive experience in blockchain and DeFi projects and is committed to using technology to bring justice and fairness to society and promote freedom. Peyman has worked with international organizations to improve digital transformation strategies and data-gathering strategies that help identify customer touchpoints and sources of data that tell the story of what is happening. With his expertise in blockchain, digital transformation, marketing, analytics insights, startup businesses, and effective communications, Peyman is dedicated to helping businesses succeed in the digital age. He believes that technology can be used as a tool for positive change in the world.
