Cash flow: Why even the best run businesses struggle with it

August 14, 2021
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3 Min read
Small and mid-sized businesses grapple with cash flow all the time. Why? And what steps can they take to improve it?

Cash and cash flow are the lifeblood of any business. But many businesses find themselves perpetually in a precarious cash position, and even the best run businesses often grapple with cash flow issues.

According to a study by the JP Morgan Chase Institute, the median business has just 27 “cash buffer days” — their cash runway. That means if money stopped coming in, they would be unable to make payroll or cover rent and other expenses in less than a month.

Many of these businesses are relatively well run. Their owners and finance managers know that customers will pay them — the question is when. Will it be soon enough to meet the requirements of their suppliers or cover other crucial expenses?

It’s exceedingly difficult to predict when you will be paid, and customers frequently pay late. For example, Levelset recently surveyed 764 construction industry professionals. They reported that about 60% of their customers paid on time in 2020. The pandemic has exacerbated the problem. This year, the same construction professionals said only 9% of their customers paid on time. And the implications of those figures bear tough consequences, as 97% of responders said they experience stress from slow payments and cash flow problems.

When customers don’t pay businesses, businesses can’t pay their bills. Timing is the crux of the cash flow management problems that plague so many businesses. While it might be difficult to admit any mismatch between accounts payable and receivable, the problem is common and not necessarily detrimental to a business’ bottom line if managed properly.

Windward Strategy managing partner and payments strategist Frank Martien notes: “Far be it from anyone to judge a business for having cash flow issues. But the reality is they’re […] principally around matching receivables and payables."

Commercial credit cards, he said, are an underserved source of working capital to address cash flow challenges.“From a working capital perspective, there’s no interest in that 30 days,” Martien said, referencing both card and invoice terms. To run a business effectively, owners and managers need a way to cover those gaps. Cards can be “a great way to do that,” he said. Short-term credit also can help businesses seize an unexpected opportunity for growth.

Forecasting and planning are critical in alleviating cash flow challenges for every business, especially small and mid-sized businesses. Modern approaches to best-in-class cash flow control use AI/Machine Learning techniques to forecast cash flows and predict when invoices are likely to be paid late.

Particularly in the wake of the COVID-19 pandemic, businesses would do well to review their cash flow control and management processes to proactively manage their most important asset: cash.

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