Small Businesses’ Cash Flow Crisis

Small businesses have a cash flow problem. Second to accounts receivables/collections, cash flow is a top accounting challenge facing North American small businesses, according to recent surveys from Wasp Barcode Technologies.

In a survey of more than 1,000 small businesses, the Wasp’s recent State of Small Business Report found cash flow tied with government regulations and employee healthcare as one of the top challenges small businesses will face in the year ahead. While employee and revenue concerns were consistent across all businesses surveyed, size matters when it comes to cash. The smaller the business, the larger the role cash flow problems play. Among businesses with 11 to 50 employees, 43 percent named cash flow as their top challenge, coming in a close third to growing revenue and increasing profit. For businesses with more than 51 employees, cash flow fell outside of the top three concerns.

The results reveal small businesses are struggling to manage their finances. When it comes to bookkeeping, most are going it alone. In a specialized survey of the accounting procedures of small businesses, bookkeeping was the procedure least likely to be outsourced. More than 70 percent of small businesses outsource tax preparation, compared with just 14 percent of businesses that turn their bookkeeping over to a professional. The survey showed business owners lack a degree of confidence when handling DIY accounting, yet most are still handling their balance sheets on their own.

Keeping an eye on cash flow is critical for small business success. Without a grasp on available cash, even a prosperous business could go under. Research from CB Insights shows more than a quarter of startups fail because they underestimated the amount of cash they needed on hand to operate their business. It may seem obvious, but many small business owners don’t consider cash flow until it’s too late.

“It’s not something most small business owners think about,” Dave Kurrasch, vice president and general manager of Small Business Payments Company, a financial technology provider, told Money.

One way to avoid a potential cash flow crisis is to obtain credit before the need arises. This approach reignites concerns over the state of small business lending. After tightening restrictions on borrowers following the financial crisis, banks are lending once again. At the same time, the alternative finance industry has also flourished, providing businesses with a variety of nonbank borrowing options. Data shows small businesses are borrowing more, up 7 percent year over year, according to the Thomson Reuters/PayNet Small Business Lending Index. Even as more borrowing conditions loosen and more lending options become available, cash flow is still a large worry for small business owners.

According to the most recent NFIB Small Business Optimism Survey, the percentage of business owners who reported their credit needs unmet dropped to a historic low of 4 percent in April. A large percentage of businesses surveyed preferred to sit on the sidelines—53 percent of respondents have no interest in a loan. The numbers are seemingly incongruous. Small businesses have a cash flow problem; yet borrowing doesn’t seem to be the top-of-mind solution.

The strain of late payments on the cash flow of small businesses can’t be ignored. In North America and abroad, the use of slow-pay terms by big companies has been well documented. Extending payment terms to 60 days and beyond forces smaller suppliers to keep an even more watchful eye over cash flow.

Neither of the Wasp Barcode Technologies surveys addresses how businesses plan to overcome the gaps in cash flow management, but it is clear it is hindering the success of small businesses.