by Marco Angioni II

Created on: March 16, 2011   Last Updated: March 19, 2011

Cash flow issues can plague a small business.  Small businesses are at an inherent disadvantage with banks because they usually do not have proven records and are generally riskier than large businesses.  As a result, it is more difficult for a small business to obtain a bank loan.  Due to this fact, cash flow is imperative to a small business’s survival.

The cash flow of a small business needs to be steady and consistent.  Steady and consistent cash flow ensures that bills will be paid as they become due.  As such, it is imperative for a small business to identify cash flow problems and solve them.

-Identifying Cash Flow Problems-

The best way to identify a cash flow problem is to thoroughly inspect your financial records.  You must be aware of when money comes in the door and when money goes out.  You must identify the due dates for your business’s bills, and you must also identify when your business is paid money it is owed.  Doing this analysis will enable you to discover whether your business needs to undertake better collection efforts or whether a discussion with the businesses creditors is necessary to modify due dates.  Put simply, analyzing the accounting records on a regular basis will help you discover whether your business is facing a cash flow problem before the problem actually occurs.  Discovering the problem before it occurs is vital to maintaining your businesses reputation with creditors. 

As mentioned above, small businesses are at an inherent disadvantage with banks and lenders.  As such, if a small business fails to identify cash flow problems before they strike, that small business could find its financial reputation ruined when it fails to make a timely bill payment and thus, prevent that small business from obtaining a loan if necessary for survival or growth.

-Solving Cash Flow Problems-

Once you discover that a potential cash flow problem exists, you must remedy the situation.  There are two primary ways to correct a cash flow problem: (1) increase collections; and (2) decrease liabilities.

Increasing collections may be difficult depending on the business in question.  If your small business is retail or food related, there really should not be much in terms of accounts receivable.  If, on the other hand, your business operates with a large accounts receivable, increasing collections from those accounts should be a priority.

If increasing collections is not a viable option, the other course of action to pursue is to decrease liabilities.  Keep in mind that cutting liabilities will most likely be a gradual process as a review of your business’s financial records will reveal areas that can be cut.  Even though cutting liabilities will not increase your cash flow, it will enable you to accumulate some capital reserves that can be used to compensate for any cash shortfalls that may occur.

Remember, the first step is to identify a potential problem before it comes to fruition.  You must carefully and continually analyze your financial records to discover a potential cash flow problem.  Once you have discovered the potential problem, you must initiate a plan that will increase collections, decrease liabilities, or both.

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