What do you do when your business has a cash flow problem?

Managing cash is one of the keys to running a business successfully, and it’s something that’s been made more complicated by the COVID-19 pandemic. You not only need cash flow for daily operations, you need it to grow, make purchases, and invest in the future of your business.

In our extensive work with small businesses, we have helped clients identify their cash flow problems and find solutions. Below are some reasons cash flow problems occur and some examples of real actions you can take if your business is struggling with cash flow.

What causes cash flow problems?

The most frequent cause of cash flow problems is that a business is simply not profitable. Many businesses (because of shutdowns, capacity rules, or customer preference) have been rendered temporarily unprofitable because of the pandemic.

If your profitability problem is the result of the pandemic, talk to your accountant or banker to see if there are programs from the SBA or the local government that might help you ride it out until life is back to normal.

Many businesses are facing these problems, and there might be a solution that your advisors are able to see based on their work with other small business clients. Your bank may also be willing to work with you to adjust payments temporarily, which could keep you from falling deeper into debt.

If your business is profitable but you’re still struggling with cash flow, chances are that it’s for one of the following reasons:

• Capital expenditures (including the purchase of equipment, furnishings or vehicles).
• Accounts receivable delays (you need to pay your vendors and employees before you get payments from your clients or customers).
• Owner distributions (pulling money out of your business yourself for a variety of reasons).
• Paying down debt (if you’re paying off a loan, this could be affecting your cash flow, though you won’t see this on a profit and loss statement).
• Overhead costs.

How can a business owner deal with cash flow issues?

If you are struggling with cash flow, your first step should be determining where your cash is going. Look at your profit and loss statement and your balance sheet, or have a statement of cash flows prepared.

Once you’ve identified the problem, there are a range of possible solutions, depending on your exact business and the nature of the problem.

Here are 7 strategies for tackling cash flow issues:

• Incentivize early payment from customers by offering perks or discounts.
• Arrange extended terms with vendors if needed. If your business is profitable but struggling with the timing or frequency of payments, it will pay to negotiate on the terms.
• Negotiate for better pricing with vendors. During the pandemic, everyone is trying to keep existing relationships. Check with your vendors to see if there’s a way to save the relationship but cut costs.
• Cut overhead costs. Business owners frequently ignore overhead costs because they think of them as constant. This is not always the case. Rent is a prime example of an overhead expense that people view this way. While the basic expense of rent can’t go away, there may be things you can do to lower your rent expense. Could you sublease some of your space to a business that complements yours? For example, if your business is a dermatology office, could you sublease to an aesthetician? If your business is a law office, could you sublease to a mediator? This extra income can offset some of your rent expense and provide a benefit to your customers.
• Secure loans. There are programs available for businesses that are struggling because of the pandemic, and you may be eligible for more money than you think. Talk to your banker, CPA, or local Chamber of Commerce to see what’s available in your area.
• Talk to your CPA, banker, or advisor. Having a strong relationship with your banker and vendors makes facilitating these conversations less complicated. If you do not have a relationship with your banker or primary vendors, it is a great time to work on those connections. And schedule a meeting with your CPA – we are here to help.
• Stay consistent with marketing and advertising. In a crisis, businesses often lower marketing and advertising budgets, but this is a critical mistake. If you have a proven track record with certain types of advertising, you probably shouldn’t reduce that budget, as that could reduce your profitability. However, it may not be the best time to experiment with new types of advertising.

Every business faces unique challenges, and your particular cash flow issue, or the exact cause of it, may not be represented above. For example, we recently worked with a doctor’s office that was struggling with cash flow. When we looked at their profit and loss statements and their balance sheet together, we realized that they had changed the way they provided a key service. Rather than performing surgery, they were using a new drug to treat the patients.

The profitability of this drug compared to the surgery was lower, but that was only part of the problem. They were also paying for the drugs before they were getting paid by the patients. The doctor’s office negotiated new terms for the drugs that better aligned with patient payments.

We also reviewed how they were using their office space. They were closed on Fridays, so they were able to supplement their rent by offering a sublease to an office user that could use the space on that day of the week.

Creative solutions like these may be hard for you to see because you’re so focused on day-to-day operations, so they may be easier for someone outside your business to spot.

If you’re struggling with cash flow and can’t figure out why, or if you just aren’t sure how to solve the problem, reach out to us at info@sbfcpa.com. We can help you diagnose the issue and determine what actions you might be able to take to solve the problem.