Solving Cash Flow Problems and Growth in Small Businesses

Table of Contents:

What is Cash Flow?
Cash Flow Problems and Growth
Managing Cash Flow During Rapid Growth
Consider a Cash Injection

Growth is an exciting time for many small businesses, but it can also be an extremely stressful experience for entrepreneurs. Cash flow can become an issue during rapid growth if demands are coming faster than the rate of your current inventory, systems, staff or account balances. 

It’s possible to get ahead of the problem if you catch it early so you can fund the growth of your business. Let’s look at cash flow management, common cash flow problems and growth in small businesses and what to do if you find yourself dealing with negative cash flow.

What is Cash Flow?

Cash flow is the net amount of cash and cash equivalents moving into and out of your business. Cash flowing into a business includes making money through sales, return on investments, loans and investors. Cash flowing out refers to the money your company spends on bills, inventory, payroll and other expenses. 

To determine your cash flow, you should add all your income and subtract your expenses to understand your business’s current situation fully. 

Cash Flow Problems and Growth in Small Businesses

As your business grows, its expenses grow as well. It can be hard to keep up with the needs and expectations of customers at a larger scale without needing to revise how you’re supplying your products or services. Poor cash flow management can mean failure for a small business.

Labor Costs

As a business owner, you may need to hire more employees to handle the increased demands on your business. Labor costs are one of the most significant operating expenses a business has, and increasing labor can be a big step to take. You may often have to pay the employees you hire before the increased cash flow that is expected starts to roll in. 

The timing of adding labor costs to your business is integral to the success of your business during the rapid growth phase. If you add labor too soon, your cash flow may be upside down for a short period of time. If you add labor too late, you may not be able to keep up with customer expectations and needs, which can negatively affect your future cash flow. 

Supplies and Equipment

Having inventory on hand and equipment ready to provide products or services at a greater level can mean you have to spend quickly. If you’ve received a big order or have to invoice with 30 or 60-day terms for these products or services, you may need an injection of cash flow to fulfill your customers’ needs. 

Additional Commercial Space

As your business grows, needing more commercial space, whether it’s office space, a warehouse, or retail space, is a common need. You may need additional space to accommodate more customers before they can show up to spend money with you. 

Managing Cash Flow During Rapid Growth 

Cash flow is the lifeblood of your business. It’s always important to keep a close eye on the numbers, but it’s critical at this point of rapid growth. You can implement several strategies to keep the lifeblood pumping and avoid a cash flow problem during rapid growth. 

Create a Cash Flow Budget

If you track your cash flow for months and years that have passed with a cash flow statement, you can better understand your income and expenses. By cash flow forecasting, you’ll be able to determine what months bring the most cash and where you can expect dips so you can prepare by getting a seasonal loan or line of credit to cover those months when cash flow dips. Taking a detailed look at your business expenses can help you make the right decisions moving forward. 

Prioritize Spending

During a time of rapid growth, hasty decisions are often made that can be highly detrimental to the future of a business. You should avoid a cash flow crisis by avoiding spending in areas that aren’t supporting the growth of your business during this time. 

Having a clear vision of what’s ahead and streamlining priorities can help you decide what spending needs must come first and what is unnecessary. Placing resources in the right places can keep your cash flow out of the red. 

Review Your Pricing Strategy

During rapid growth, you may wonder if you’re charging what your product or service is worth. If you are struggling to keep up with the demands of your customers because you’re not charging enough to afford the time or supplies it takes to provide a quality experience, it may be time to raise your prices. As long as you provide quality on which your customers are willing to spend, you may have some room for growth in pricing as demand increases. Consider the pricing of your competitors and if your price is keeping up with the current market. 

Limit Your Inventory

If you offer a wide variety of products, take a closer look at your customer’s spending habits. This is a time to provide more of what your customers are most interested in and cut the rest. Idle inventory that sits for months or moves slowly during growth costs you money in storage, labor and insurance. Cut unnecessary inventory and focus more on what your customers trust you with most. 

Optimize Your Processes

Ask yourself and your team to consider if there are ways to increase productivity without having to spend more money. Are there strategies that you can implement to streamline your processes to accommodate increased demand? If your team feels listened to, appreciated and guided by your vision, they’ll find the details they can optimize, and you’ll have buy-in that benefits your business and everyone who works with you. 

Get Serious about Billing and Collection

If your business depends on invoicing customers, this aspect of your business has to be a priority during growth. You cannot leave payment as an afterthought for your clients or customers. Be clear upfront on your payment terms and be firm in your expectations. 

If your business promptly provides a product or service, you should expect to be depositing checks in the bank just as quickly. This may be the time to shorten your payment terms and create simple routines for customer payments. 

You can offer subscription models and payment platforms that allow customers to schedule automatic payments. You can also set up a time to contact clients with outstanding invoices or automate reminders to be sure your business has the cash flow to take care of your own financial obligations. If it becomes too much for you to handle on your own, outsourcing accounts receivable may be the way to go. Don’t be afraid to be the squeaky wheel regarding your growing business. 

A Cash Injection Could Support Your Business Growth

Consider a cash injection if you’re experiencing a cash flow shortage during a time of rapid growth. Seeking a small business loan to fund increased labor needs, supplies or equipment purchases can make the difference between skyrocketing to the next level or falling into the abyss of failed businesses. 

Seeking financing may seem stressful for an entrepreneur, especially if you’ve never done it. However, working with a financial organization that supports small businesses can offer a more straightforward and supportive experience. TEDC Creative Capital offers several options for small business loans for Tulsa businesses. These financing opportunities can provide the cash flow you need to hire employees, purchase equipment or secure commercial space for your growing business. Our team also offers support through learning opportunities to help you through each phase of your entrepreneurial experience. Apply with TEDC Creative Capital today if you need small business financing to support your business in reaching the next level.