5 Key Symptoms of Poor Cash Flow and How to Fix Them

Managing cash flow is a constant challenge for small business owners, yet it’s the key to staying afloat and thriving. Poor cash flow is one of the leading causes of small business failure, but it doesn’t have to be a death sentence. By regularly checking in on your cash flow health and taking corrective actions early, you can prevent financial struggles from spiraling out of control.
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In this article, we’ll highlight five key symptoms of poor cash flow and provide immediate actions you can take to improve your financial health.

1. Unpaid Invoices

Unpaid invoices are a major cash flow killer. When clients delay or ignore payments, your business has less cash available for essential expenses like payroll, rent, and inventory replenishment. The longer invoices remain unpaid, the more strained your financial situation becomes.

What’s at risk?
Cash flow bottlenecks can prevent you from investing in growth opportunities, paying your bills on time, or even securing financing in the future.

Immediate Actions:

• Set Up Automated Reminders: Use invoicing software that automatically sends reminders for overdue payments. This ensures you don’t miss follow-ups and helps maintain professionalism.
• Offer Payment Plans: If clients are struggling to pay in full, offer flexible payment plans or smaller installment options to ease their burden while maintaining cash flow.
• Invoice Factoring: If you need cash quickly, consider invoice factoring. This lets you sell your outstanding invoices to a third party for immediate cash, though at a discounted rate.
• Review Client Payment History: Keep track of clients who consistently delay payments. For repeat offenders, consider adjusting your payment terms, or even requiring upfront deposits on future work.
  
  

2. Uncontrolled Spending 

While it’s important to invest in your business, uncontrolled or unnecessary spending can quickly drain your available cash. It’s easy to fall into the trap of paying for services, tools, or subscriptions you no longer need, or overspending in areas that don’t directly contribute to growth.

What’s at risk?
Overspending can lead to a situation where you have the revenue, but it’s tied up in expenses that don’t add value. This can leave you without the flexibility to respond to unexpected cash flow gaps.

Immediate Actions:

• Re-Review P&L: Reviewing the business cost structure in light of a cash flow crunch will often result in “obvious” cost cutting opportunities.
• Audit Subscriptions and Services: Review all recurring subscriptions, tools, and services. Cancel anything you’re no longer using or that isn’t helping you grow.
• Implement Spending Limits: Set clear limits for discretionary spending. For every major purchase, ask yourself if it’s essential to your business’s survival and growth.
• Negotiate with Vendors: Reach out to your vendors and service providers to renegotiate pricing, ask for discounts, or inquire about better payment terms.
• Switch to Pay-as-You-Go Services: Instead of committing to expensive yearly contracts, look for pay-as-you-go or month-to-month options that give you more financial flexibility.
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3. Slow Inventory Turnover

Slow-moving inventory ties up valuable cash that could be used elsewhere in the business. Excess inventory often means you’ve overestimated demand, or you’re holding on to items that no longer sell. Stagnant stock can also increase storage costs and, in some cases, lead to stock becoming obsolete or unsellable.

What’s at risk?
If inventory continues to sit on your shelves, you’re not only losing out on potential profits, but also incurring unnecessary storage fees and possible loss of inventory value over time.

Immediate Actions:

• Clear Out Excess Inventory: Run a sale or offer promotions to move slow-moving stock. Discounts can attract customers and free up cash.
• Refine Inventory Forecasting: Leverage demand forecasting tools or sales data to better predict customer demand and adjust your ordering habits accordingly.
• Negotiate Smaller Orders: Work with your suppliers to reduce your minimum order quantities or make more frequent, smaller orders. This will keep inventory lean and cash more fluid.
• Sell Excess Stock via Other Channels: Consider alternative sales channels like online marketplaces, discount stores, or liquidation services to move excess inventory more quickly.
  
  

4. Tight Payment Terms with Suppliers 

Having favorable payment terms with suppliers is one of the most important elements of healthy cash flow. Longer payment terms (e.g., 60 or 90 days instead of 30) give you more time to pay bills, which can significantly reduce cash flow stress, especially if you're waiting on customer payments.

What’s at risk?
Tight payment terms put pressure on your cash flow, leaving you scrambling to make payments before the funds come in from clients or sales.

Immediate Actions:

• Negotiate Extended Payment Terms: If your suppliers’ payment terms are short (e.g., 30 days), ask for longer terms, such as 60 or 90 days, to give you more breathing room.
• Capitalize on Early Payment Discounts: If you have the cash, take advantage of early payment discounts, but only if it doesn’t strain your cash reserves.
• Diversify Your Supplier Base: If one supplier is offering unfavorable terms, look for other vendors who may be able to offer more flexibility or better pricing.
• Track and Manage Payments Proactively: Use accounting software to track your payables and ensure you're never caught off guard by upcoming payments. This can help you stay ahead and avoid missed deadlines.

5. No Financial Forecasting

Without forecasting, it’s nearly impossible to predict cash flow shortages or surpluses. Financial forecasting helps you plan ahead for both expected and unexpected expenses. It gives you the foresight to make smarter decisions and avoid cash flow crises.

What’s at risk?
Lack of forecasting often leads to situations where a business is blindsided by bills, supplier demands, or slow months. This can force you to make hasty, unstrategic decisions, like taking on debt or borrowing at unfavorable terms.

Immediate Actions:

• Create a Cash Flow Forecast: Start by forecasting your business’s cash flow for the next 30, 60, or 90 days. Use a spreadsheet or cash flow forecasting software to track your inflows and outflows.
• Review Your Receivables: Predict when payments will come in, and ensure you’ve accounted for expected customer invoices.
• Scenario Plan: Map out different financial scenarios, such as a large, unexpected expense or delayed payments, and create contingency plans.
• Review Weekly: Make cash flow forecasting a regular habit by reviewing it weekly. This will help you stay on top of any financial fluctuations and adjust as needed.

Conclusion

Cash flow is the lifeblood of any small business. By regularly monitoring for these five symptoms, you can identify potential problems early and take corrective actions to keep your finances healthy. Remember, the sooner you address cash flow issues, the easier they are to resolve. Implement these immediate actions to safeguard your business from financial strain and build a foundation for sustainable growth.

Ready to take control of your cash flow? Join us for our free webinar where we dive deeper into these topics and provide additional tools and strategies to manage your business’s finances effectively.