Cash flow constrictions cramping small business growth

By Jeff Domansky

The majority of small businesses in six countries (60%) experience cash flow issues at some point, so it’s no surprise 89% of small business owners say cash flow issues negatively impact their business. In fact, it’s among the top three issues for 76% of small business owners, according to research from QuickBooks.

If there’s any doubt about the effect of cash flow constrictions, look at the top five consequences:

negative impact on business growth
unable to take on new projects
missed opportunities for capital investment
impact on ability to meet payroll
lost opportunity for employee salary raises.

“The pandemic has accelerated the need for tools that can help small businesses get access to their hard-earned money fast and instill confidence as they seek to make the right cash flow decisions,” said Rishav Chopra, Head of Product, Payments Experience & Platform at QuickBooks.

A 2020 Federal Reserve Banks survey found nearly one in five small businesses would have to close if they experienced a two-month revenue loss.

The QuickBooks study highlights not only the biggest cash flow challenges but also presents some valuable and practical solutions.

Causes of cash flow issues

“We know that money is the lifeblood of small businesses and how critical cash flow is. Through this research, we sought to identify the causes of the cash flow issues small businesses face today so we can continue to develop even more powerful tools that improve money movement and management. This is even more critical in the times we live in today,”

The QuickBooks Intuit study highlighted the biggest causes of cash flow issues, including decreasing sales/margins (31%), not getting paid according to terms (27%), lack of cash reserves (26%), seasonal demand changes (25%), outstanding receivables (23%), and debt payments (20%).

One-third of small business owners spend 3 to 5 hours a week managing money, and 25% take 6 to 9 hours on the task. As any small business owner knows, there are only so many hours in the day to generate sales, run the business, make payroll, and find time to plan for the future.

23% of payments to small businesses are late

The research shows nearly one-quarter (23%) of payments to small businesses worldwide are overdue.

Investing in the right tools is just one way to improve collections without alienating customers. “Almost half of small business owners (47%) have started accepting payments in new ways since the start of the pandemic. Forty-six percent of small businesses that offer contactless payment methods for their customers started doing so during COVID-19,” the report noted.

There’s still work to be done as (63%) report they don’t know precisely how much cash comes into their businesses each month, and even more (67%) aren’t entirely confident about how much money customers still owe them.

There’s a domino effect that happens with late monthly payments. “79% of small businesses struggled to pay a supplier, up from 71% pre-pandemic. These late payments damaged supplier relationships for nearly two-thirds of business owners surveyed (65%), and resulted in late fees for 72%,” said the report.

“Our research shows that more than a quarter of small businesses (27%) attribute cash flow problems to customers not paying according to the agreed-upon terms. QuickBooks Payments helps small businesses get paid fast no matter how their customers pay or where they do the work. Our frictionless payment capabilities enable small businesses to accept many kinds of payment (in-person, online, or mobile) and get paid faster,” Chopra said.

Clearly, better tools such as automated invoicing using AI and RPA processes are vital to getting late payment problems under control.

Solutions to cash flow problems

73% of small business owners said they use payments tools to manage their cash, but many are unhappy with the features at their fingertips.

They told QuickBooks they wanted better historical tracking capabilities of cash flow, more time-saving automation, and better integration with other financial tools.

When considering which payment option is best for them, Chopra encouraged small business owners to think about their customer needs, business models, and tools that can offer features, functionality, flexibility, and security to get paid on time and improve cash flow.

“This is one of the most important decision small businesses can make today, and with customer payment behaviors and needs changing, it is even more important for them to get right to help their business grow.”

Building cash reserves is a crucial way to reduce cash flow challenges. More than 25% of small business owners said a lack of cash reserves was the biggest reason for problems. 69% put personal funds into their business once a year to keep it running, and 29% did so at least every quarter.

Improved tracking and quicker response on receivables is another critical solution, especially for the 44% of small business owners who said their cash flow issues came as a surprise. Better forecasting is an additional piece in the cash flow management puzzle.

Better times ahead for small businesses?

A US Federal Reserve study shows more than 200,000 US businesses closed permanently due to the pandemic.

But additional research of more than 1 million US businesses by QuickBooks in April 2021 shows even those most impacted by COVID-19 recovering to their pre-pandemic revenues. There’s light at the end of the tunnel, and it’s not a freight train coming at small business owners.

Wakefield Research conducted the QuickBooks research among 3,500 small business owners of companies with less than 100 employees, including 1,000 businesses in the US and 500 in each of the UK, Australia, Canada, India, and Brazil, between March 30 and April 20, 2021. You can read the detailed results of the QuickBooks Payments and Cash Flow Survey here.