Your Business Could Be Headed for a Cash Flow Crisis If You're Not Following These Steps

Cash Flow Crisis

According to a recent survey, small business owners are more optimistic about the economy and the performance of their companies. The MetLife and U.S. Chamber of Commerce Small Business Index for the second quarter of 2024 found that 36% of small and medium-sized businesses believe the U.S. economy is in good shape, and 42% say their local economy is healthy – both up 12% from the same period last year. 73% of SMBs said their cash flow is currently healthy, up 6% from the end of 2023.

However, 55% of SMEs said inflation is still the biggest challenge they face. If your company is still struggling to control expenses and your customers are becoming more price sensitive, you may be vulnerable to cash flow shortages. Fortunately, recent economic data is indicating that inflation is subsiding rapidly. In September, the Fed cut interest rates to help the economy achieve a “soft landing” to tame inflation while keeping it from slipping into recession.

Lower borrowing costs and lower inflation in an economy with soft economic conditions will be good news for SMEs. But even if your business is currently in a good cash flow position, this could be a good opportunity for SME owners to rethink their cash flow management practices.

Let’s look at why SMEs need to act now to strengthen their cash flow, keep their business profitable, and support growth in 2024 and beyond.

Why are SMEs more at risk?

Most SMEs, due to their size, are more at risk of cash flow shortages than larger companies. There are three main reasons for this:

Access to credit is more difficult: SMEs do not benefit adequately from traditional bank loans, and may have difficulty accessing affordable credit. The Federal Reserve’s 2024 Small Business Credit Survey of Employers found that 29% of small businesses had difficulty obtaining a loan in the past 12 months. Without access to credit, it’s no surprise that the Fed survey also found that 49% of small businesses face uneven cash flow and 52% have difficulty paying operating expenses.

Slow and delayed payments: Unfortunately, SMEs are also vulnerable to the uncertainties of delayed payments and slow payment by customers. The Federal Reserve’s Small Business Credit Survey found that 39% of small businesses said they had problems with delayed payments by customers, and 18% reported problems with delayed payments or availability of funds.

Seasonal cash flow trends: Small companies that rely on seasonal revenue may also be more prone to cash flow problems. For example, clothing distributors and manufacturers may see an increase in demand ahead of the holiday retail season, while gardening companies may see slower revenue during the winter months. Seasonal cycles make it especially important for SMEs to improve their cash flow resilience and maintain adequate working capital throughout the year.

Despite the challenges of managing cash flow, SMEs are not helpless. They have several powerful advantages and resources to help them solve cash flow problems.

How SMEs can overcome cash flow problems

Here are some cash flow management strategies more SMEs should consider to improve the financial performance of their business.

Review your payment terms: Small businesses thrive on customer relationships, but sometimes their goodwill and generous payment terms are taken advantage of by customers who pay slowly. It is important for SMEs to strike the right balance between a clear focus on customer retention and the need to enforce realistic payment terms and polite (but firm) collection policies.

Strengthen customer relationships: Some customers may not realise that their slow payments or generous payment terms are becoming a problem for your business. Communication is key. SMEs should let customers know why timely payment is vital to the health of their business and their ability to remain good partners. Look for ways to offer discounts or provide value-added services in exchange for quick payment terms. Many B2B customers who really value your products or services as a supplier or vendor will not want to lose you; they want to keep good suppliers. Sometimes the best payment terms for your business can be beneficial to everyone.