Which Came First – The Chicken or the Cash Flow Problems

Whether or not you deploy invoice factoring or other financing tools to resolve cash flow problems, drill down to the root of the problem to prevent it from impacting your growth again in the future.

Cause or Effect? Exploring the Relationship of Common Business Challenges and Cash Flow Problems

“Access to capital” is commonly cited among the top cash flow problems for small business owners and startups, in particular. But often low cash flow is a symptom, not the cause.

We just published an article which listed the top ten reasons B2B startups fail – or fail to thrive – during their early years of existence. While “access to working capital” was not specifically listed among the reasons, many of the reasons that these small businesses failed tie back to cash flow problems in some way. So much so that someone on LinkedIn asked why “access to capital” was not on the list:

“Good info to share. I have read several articles that say the #2 reason for failure is the lack of revenue / cash flow / financing.”

Is inadequate cash flow the cause or just the symptom when things are going sideways in a B2B startup or young business? It’s sort of a “which came first, the chicken, or the egg?” type of question. It’s easy to point to lack of working capital or slow cash flow as the problem, when actually, cash flow problems are the result of another issue whose roots lie elsewhere.

Here’s another look at the list we shared, along with an analysis of what symptoms might be present within a business experiencing the same type of challenge, along with steps you can take to address the challenge if you discover it in your organization.

More than Cash Flow Problems: Warning Signs of the Top 10 Challenges that Derail Startups and Small Businesses

Emotional Pricing and No Understanding of Pricing (#1 and #4 on the list)

If goods or services aren’t priced high enough to produce the margins needed for a business to be profitable, it can quickly result in low cash flow. Conversely, if products are priced too high it can result in inadequate volume of sales needed to produce the revenues required to meet operational needs (and result in low cash flow).

You may be able to fix your pricing strategy by conducting some competitive research or establishing a value proposition that resonates with more buyers. You may also need to determine whether there is an adequate number of buyers in your target markets to support a particular product or service; if the market is inadequate, it might be necessary to scrap or table the item for the time being.

Living Too Large (#2 on the list)

Many entrepreneurs become small business owners out of a desire to build a better life for themselves, and it’s understandable that they (or their investors) would want to enjoy the fruit of their labor. Low cash flow can be symptomatic of the removal of too much operating revenue by an owner or investors. This challenge can be addressed through proper financial planning and having controls in place (or the self-discipline required) to ensure that the business retains the revenues it needs for day to day operations and growth initiatives.

Not Paying Taxes and No Experience in Record-Keeping (#3 and #7 on the list)

Many tax preparation professionals have a number of clients who are also sole proprietors and small business owners, and nearly all could probably tell you a story about doing taxes for a small business owner who had failed to set aside money for state or federal taxes. Not paying taxes at all, or not paying enough in taxes is a sure-fire way to hurt a small business.

We have included lack of experience in record-keeping here as well because both non-payment of taxes and poor record keeping are related; and both can find fixes in working with a professional accountant or bookkeeper in order to ensure that the paperwork is done right and taxes are filed and paid on time.

Both can also result in low cash flow; and in particular, as you work through your pricing strategy, it’s important to include projected tax expenses as you calculate margins and set prices for your goods or services.

Lack of Planning (#5 on the list)

Lack of planning can negatively impact any number of areas within a small business. Lack of planning could result in stocking too much or too little inventory. Lack of planning could result in having too many staff on board or not enough personnel. Some small business owners are inherent planners, others are more inclined to be visionaries. Some see the big picture, others the details.

One important thing for any business leader to remember is that it’s rare for any one person to have all the skills, abilities and inclinations needed to do everything that needs to get done in the business – and do it all well. This challenge can be addressed by hiring to your inadequacies, finding good mentors and recognizing where you need help (instead of trying to do everything yourself).

The bottom line: If planning in many or even just one vital area of your business is not your strong suit, don’t be afraid to ask for help.

No Understanding of Financing and Inadequate Borrowing (#6 and #10 on the list)

Meeting with a business finance expert as you launch your organization and as you grow can help to ensure that your finances will be correctly set up and understandable. Clarity in this area can help you identify problems as they emerge, before they hurt your business, and while there is still time to act to resolve them.

Additionally, it’s important for small business owners and entrepreneurs to understand that there are financing alternatives available that can help resolve common cash flow challenges. For instance, we offer business financing programs that can help small businesses with low or slow cash flow, including receivables invoice factoring that allows an organization to “speed up” collection of customer invoices in order to create more consistent cash flow and take on new business more quickly.

Poor Credit Granting Practices (#8 on the list)

As with setting prices, organizations can make the mistake of extending terms that are too generous, thus affecting cash flow because customers take a long time to pay or they can make the mistake of setting customer terms that are not generous enough, so that competitors look more attractive to their customers.

The good news for companies that invoice their customers after delivering goods or performing services is that invoice factoring can alleviate this challenge altogether. When companies factor invoices, they can receive payment on a customer’s invoice the same day the invoice is generated, without waiting for customers to pay.

Expanding Too Fast (#9 on the list)

When organizations try to expand too quickly, they often deplete resources (including working capital) to the point that the business may have trouble meeting operating expenses. This is another instance where simply working with a financial planning expert and creating a manageable, controlled plan for growth can prevent the problem from occurring.

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Get more information about how invoice factoring can speed up B2B organizational cash flow: