Most professionals understand that to be profitable, the money coming in must be more than the money going out. Cash flow is crucial to the success of a business, but it is often a sensitive topic for business owners. A staggering 82% of small businesses fail due to cash flow problems, making it the number one reason small businesses fail. But cash flow is far from simple because it can cover a wide range of problems. Read on to learn the eight most common business cash flow problems and how CFO services can help you solve them effectively.

Why is cash flow important?

Positive cash flow allows you to grow your business, invest in new ventures, or hire new employees. Negative cash flow means more money is going out than coming in, which ultimately leads to failure. Cash is the lifeblood of your business, ensuring that payments for inventory, salary, rent, and additional operating costs are made. If your cash flow is affected, CFO services can help you identify the problem, which is the first step in finding a viable solution.

1. The cause of the problem is unknown.

Identifying that you have a cash flow problem is usually not difficult. When the expense exceeds the cash available, it is obvious that the lack of cash becomes a problem. However, if you want to address the problem, you will need to identify the cause. For many businesses, a lack of cash can arise without an immediately clear source.

Planning and organization are crucial to understanding your cash flow. Start by classifying your expenses and writing down the percentages for each category. If your current cash allocation doesn’t make sense for your business goals or operations, you may be overspending in one or more categories. Focus your efforts on reducing spending or making adjustments in the highest categories first.

A financial professional, such as a part-time CFO, can provide valuable information for your cash distribution. They can offer expert advice on the current state of your cash flow allocation and suggest improvements. Plus, by hiring a part-time CFO, you can benefit from financial expertise without committing to a full-time executive salary.

2. The books are not organized.

Entrepreneurs and business owners are busy, so accounting often falls to the back of the priority list. Unfortunately, disorganized books can cause headaches down the road. Inconsistent billing, missing payment records, and disorganized billing can result in wasted money and serious cash problems.

Organizing your books takes time, but it can help you identify unpaid bills or other inconsistencies that are losing you money. Putting an accounting system in place can help ensure that your books are always up to date. This system can also generate reports that provide information to both you and your accounting team about the financial health of your business. If your team doesn’t have the talent to keep sufficient accounting records, a part-time CFO can be a valuable addition to your team.

3. There are no cash flow benchmarks.

Are your budgets based on data? Allocating money without a clear purpose or reason is dangerous and often leads to cash flow problems. It’s easy to start a cycle of overspending, making it harder to cut back later. Researching your industry and the spending of similar companies can help provide a benchmark for your cash position. Be sure to identify companies at a similar stage of the lifecycle to get the most accurate benchmarks.

This is another area where a financial expert can be valuable. Part-time CFOs have a wide range of experience with many companies. They can offer guidance based on their experience, especially when it comes to comparing your cash position.

4. Expenses are too high.

Many companies deal with this problem from time to time. Expenses can easily add up over time, often going unnoticed until a cash problem arises. To combat this problem, it’s important to monitor your spending regularly. Understand the expenses your business consistently pays and determine which items can be cut or renegotiated. After completing your benchmarking, you may notice that you are overspending compared to your competitors or the industry. This information can be used as leverage to renegotiate the terms of the contract for large expenses.

5. Bad debts are piling up.

If a small business doesn’t have a credit monitoring system in place, bad debt can add up quickly. When customers owe money that cannot be recovered, cash flow problems are likely to occur. Once you’ve got your books organized and an accounting system in place, adding a credit monitoring system is the next simple step. From email reminders and letters to working with a debt recovery company, there are many ways to reduce bad debt.

6. Credit terms are out of sync.

The payment periods to your suppliers should align with the terms for your customers. By synchronizing your credit terms, you can better control your cash flow. When credit terms are out of sync, unexpected expenses have the potential to ruin your business or seriously cripple your cash flow.

Renegotiate the terms with your suppliers and customers if necessary to synchronize your credit terms. This can be a large and time-consuming project, but it’s ultimately worth it to balance your cash flow.

7. Cash flow is tied to inventory.

If your cash flow problems aren’t related to overspending, your inventory or sales cycle may be to blame. Home inventory for long periods of time immobilizes your assets, reducing available cash and storage space. You must have the necessary amount of inventory on hand to fulfill orders while holding items for the shortest period of time you can manage. It may even be necessary to analyze your sales and determine which products or services have low margins.

Your sales cycle can also help predict your cash flow. Fully understand your sales cycle to accurately forecast your inventory needs and cash inflow over time. It’s also important to identify the seasons of change for your sales cycle, so you can prepare ahead of time. A part-time CFO can help with this task by compiling various models and forecasts based on your company and industry.

8. Growth is happening too fast.

While growing your business is often a positive thing, uncontrolled growth can lead to cash flow problems. Hiring additional staff or increasing your supplies in anticipation of more business can leave you with wages or bills you can’t pay. Uncontrolled growth results in higher expenses before you get paid by customers, and these cash flow problems can cause your business to fail.

If you’re interested in growing your business, a financial advisor can provide valuable information. With a broad range of experience, part-time CFOs can guide you through the process of growing your business at a steady pace that is sustainable over time.