LivePlan Blog Managing

The Top 10 Cash Flow Problems (and How to Avoid Them)

Noah Parsons

11 min. read

Updated July 7, 2025

Jump to

1. Slow Customer Payments2. Poor Management of Accounts Payable3. Inaccurate or Outdated Cash Flow Forecasts4. Rapid Growth Drains Cash5. High-Cost Borrowing and Debt Management6. Sales or Margins Decline Without Corresponding Expense Cuts7. Inefficient Inventory Management8. Inadequate Emergency Reserves9. Poor Lease vs. Buy Decisions10. Weak Marketing ROI and Customer AcquisitionThe Best Way to Avoid Cash Flow Problems: Proactive Management

Jump to

1. Slow Customer Payments2. Poor Management of Accounts Payable3. Inaccurate or Outdated Cash Flow Forecasts4. Rapid Growth Drains Cash5. High-Cost Borrowing and Debt Management6. Sales or Margins Decline Without Corresponding Expense Cuts7. Inefficient Inventory Management8. Inadequate Emergency Reserves9. Poor Lease vs. Buy Decisions10. Weak Marketing ROI and Customer AcquisitionThe Best Way to Avoid Cash Flow Problems: Proactive Management

Cash flow challenges are one of the most common hurdles small business owners face, and they can strike even profitable companies. In fact, 82% of small businesses fail due to cash flow problems. Poor cash flow is a big reason why one in every four businesses won’t survive its first year, and why more than half of businesses don’t survive past the fifth. Recent data shows that 60% of small businesses struggle with cash flow management, while 22% of US small businesses can’t make ends meet because of cash flow issues.

The difference between businesses that thrive and those that struggle often comes down to how well they identify, understand, and address cash flow problems before they become critical. According to recent research, cash flow management remains the second biggest challenge for small businesses, right behind inflation concerns.

Understanding the most common cash flow problems—and more importantly, knowing how to solve them—is essential for any small business owner. These issues can emerge quickly and catch you off guard, but you can avoid each of these common cash flow problems with the right strategies and a proactive approach.

1. Slow Customer Payments

The Problem: When customers consistently delay payments or you don’t have effective collection processes, your accounts receivable—the amount of money your customers owe you but haven’t paid yet—grows, while your available cash shrinks. Current data reveals that over 50% of global B2B invoices are overdue, with 81% of businesses experiencing an increase in delayed payments. In 2024, invoices were paid on average 7.3 days late. When you invoice a customer, you just have the promise of their payment, not actual cash. If your receivables are growing month after month, but you’re not bringing in more cash, it’s time to take a serious look at your payment terms and invoicing system.

The Solution: Review and optimize your payment terms and collection policies to improve how fast you get paid (also called “accounts receivable turnover”).

Action Steps:

• Set crystal-clear payment terms: When you submit a project proposal or contract, set clear payment terms in writing. Likewise, when sending an invoice, ensure that the payment terms are spelled out again.
• Use plain language: Research from FreshBooks shows that using the words "21 days" as opposed to "Net 21" in your payment terms gets invoices paid more often and faster.
• Be polite but direct: A simple "please pay your invoice within X days," or even a "thank you for your business" message on your invoice can increase the percentage of invoices paid by more than 5 percent.
• Send invoices immediately: Try accelerating your billing process  by sending out invoices the moment that jobs are complete or orders are shipped.
• Offer discounts for early payment: Giving your customers an incentive to pay early can also make a big difference. Even a small percentage discount on the invoice could improve payments.

2. Poor Management of Accounts Payable

The Problem: Paying your bills too early or not strategically managing payment timing means you’re giving up cash unnecessarily and potentially creating cash shortages.

The Solution: Maintain a contingency fund, and arrange for flexible payment terms with lenders who understand your business cycle and can give you an optimal payment schedule.

Action Steps:

• Time payments strategically: Schedule payment of your bills to happen on the day before they are due. This is what professional organizations like utilities and credit card companies expect.
• Take advantage of early payment discounts: You may find that vendors provide substantial discounts if you pay on time or earlier. Weigh the potential cost savings here and be sure that you still have enough money in the bank.
• Negotiate better terms: Work with suppliers to establish payment terms that align with your cash flow cycle, especially during seasonal fluctuations.

3. Inaccurate or Outdated Cash Flow Forecasts

The Problem: Flying blind is never a good strategy. Without forecasting, you can’t anticipate cash flow problems or identify opportunities to invest in growth.

The Solution: Schedule regular reviews of your forecasts, compare your projections to your actual results, and adjust your forecasts based on any new information the comparison reveals.

Action Steps:

• Review forecasts monthly: Every month, compare where you are against your forecast and previous results. When you add the context of your previous performance, a monthly financial review provides a wealth of information.
• Watch for changes: If you've been going along for years with 50% of your sales on credit, and suddenly it rises to 70%, it's a red flag that some part of your business isn’t running as expected.
• Update assumptions regularly: As your business evolves, ensure your forecasting assumptions remain relevant and accurate.

4. Rapid Growth Drains Cash

The Problem: This might sound like a good problem to have, but rapid growth can actually strangle your cash flow. If sales are going well, customers may order even more products, perhaps doing this before they have paid for the first shipment.

The Solution: Look for ways to moderate growth and prioritize getting your finances in order, or raise additional capital to fund expansion sustainably.

Action Steps:

• Plan growth carefully: Though you might be very eager to scale or grow your business quickly, it's important you make sure to do so at a reasonable rate.
• Secure growth capital: Arrange financing before you need it to support increased inventory, payroll, and operational costs that come with growth.
• Improve collection timing: Tighten payment terms for new customers, and consider requiring deposits for large orders.
• Monitor cash runway: Without forecasting, you can't anticipate cash flow problems or identify opportunities to invest in growth.

5. High-Cost Borrowing and Debt Management

The Problem: Expensive loans or high-interest debt can drain your cash flow, making it difficult to invest in growth or handle unexpected expenses.

The Solution: Refinance loans to secure lower payments, consider debt consolidation, or explore alternative financing options like supplier financing.

Action Steps:

• Review current debt costs: Analyze all existing loans and credit facilities to identify refinancing opportunities.
• Explore supplier financing: Payment solutions like supplier financing—where buyers of inventory or equipment get loans or payment plans from the equipment seller—can also help businesses improve cash flow and avoid additional debt.
• Consider debt consolidation: Combining multiple high-interest debts into a single, lower-rate loan can improve monthly cash flow.
• Build relationships with multiple lenders: Having access to various financing options gives you flexibility when cash flow challenges arise.

6. Sales or Margins Decline Without Corresponding Expense Cuts

The Problem: When revenue drops but expenses remain the same, your cash flow takes a double hit. Many businesses are slow to react to declining sales, hoping the situation will improve on its own.

The Solution: Review your expenses and pricing strategy to determine if you should adjust prices, cut costs, or discontinue products or services with weak margins.

Action Steps:

• Conduct regular expense audits: Consider reviewing your spending once a quarter. It’s amazing how quickly small subscriptions and additional services add up over time, especially in a business. Performing an audit is a great way to determine what tools and services are useful and how much money you're spending.
• Create a crisis management plan: Develop predetermined expense reduction strategies you can implement quickly when revenues decline.
• Review your pricing strategy: If you've been struggling to maintain steady cash flow and haven't raised prices in a while, it may be time to do so.
• Analyze product profitability: Identify which products or services have the strongest margins and focus your resources there.

7. Inefficient Inventory Management

The Problem: If a majority of your cash is tied up in inventory but your customers aren’t racing to buy, you might start to run short on cash. This is because you have to pay your regular operating costs and until your inventory starts to sell, you won’t have liquid cash available to pay your bills. Studies show that over two small businesses out of five use manual inventory processes or don’t track their inventory at all. Unfortunately, cash flow problems are likely when inventory management fails, and those problems can be significant.

The Solution: Use an inventory management system to balance your inventory levels, which should help you keep products on hand for the shortest time possible while still meeting customer demand.

Action Steps:

• Analyze inventory turnover: Review your current inventory, taking note of merchandise that doesn't move as quickly as other items.
• Clear slow-moving stock: Sell that slower moving inventory at a discount, bundle it with other successful sales items, or donate it to claim a tax benefit.
• Balance volume discounts: You may be able to take advantage of volume discounts if you make  larger purchases. But the risk is less cash in the bank if you're unable to sell that extra volume.
• Implement just-in-time ordering: Use demand forecasting—reviewing past sales data to determine the seasonal demand for your products or services—to order inventory closer to when you'll actually sell it.

8. Inadequate Emergency Reserves

The Problem: Without sufficient cash reserves, any unexpected expense or temporary revenue decline can create a cash flow crisis that threatens your business operations. Current data shows that 70% of small businesses hold less than four months’ worth of cash reserves, leaving them vulnerable to unexpected challenges.

The Solution: Build and maintain appropriate cash reserves by forecasting your needs and systematically setting aside funds each month.

Action Steps:

• Calculate reserve needs: Start with monthly forecasting: You need a cash flow forecast that predicts your future cash flow and shows you how much money you'll have in the bank in the coming months.
• Establish three types of cash: Start by building your reserve and operating cash first—these provide stability. Once those are solid, focus on accumulating strategic cash that will fuel your next phase of growth.
• Automate savings: Set up automatic transfers to a separate business savings account to build reserves consistently.
• Consider high-yield options: Make your money work for you with a high-interest savings account.

Related Articles

10-Step Problem Solving Process for Business Owners and Entrepreneurs

How to Get Paid Faster: 9 Ways to Turn Unpaid Client Bills Into Cash

How to Effectively Manage Cash Flow to Grow Your Business

9. Poor Lease vs. Buy Decisions

The Problem: Tying up too much cash in equipment purchases or long-term commitments can strain your liquidity, especially when cash flow is already tight.

The Solution: If your business is strapped for cash, you might want to consider leasing equipment and renting retail or office space rather than buying it outright.

Action Steps:

• Evaluate cash impact: Buying equipment or office space requires a ton of cash that you may be better off using for other things. Instead, consider leasing to keep your cash outflow low and consistent.
• Time major purchases: Make long-term investments and purchases when your business is able to successfully manage the cost.
• Consider operational flexibility: Leasing often provides more flexibility to upgrade or change as your business needs evolve.

10. Weak Marketing ROI and Customer Acquisition

The Problem: Spending money on marketing that doesn’t generate sufficient returns, or focusing too heavily on acquiring new customers while neglecting existing ones, can drain cash without improving long-term profitability.

The Solution: Focus on improving marketing ROI and maximizing revenue from existing customers before investing heavily in new customer acquisition.

Action Steps:

• Maximize existing customer value: Pay attention to your existing, repeat customers and determine what additional products or services you can sell to them. Successfully growing sales from existing customers is often much more cost-efficient than pursuing a new market or new customers.
• Test small-scale changes: Instead of launching large and unproven campaigns, test out smaller versions of those campaigns to prove their effectiveness, before you scale to a larger audience. If the campaign proves not to work, you’ll have risked less cash by testing without over-investing.
• Measure marketing ROI: Throughout this process, look to improve your return on investment (ROI) in pursuit of spending less on marketing to acquire every new customer.

The Best Way to Avoid Cash Flow Problems: Proactive Management

The best way to avoid cash flow problems is through consistent, proactive cash flow management. Research confirms that small businesses that monitor cash flow on a monthly basis have an 80% survival rate, compared to survival rates below 50% for businesses that don’t track their cash flow regularly.

This means maintaining accurate forecasts, regularly reviewing your financial statements, and making data-driven decisions before problems become critical. 

Here are the keys to better, proactive cash flow management:

• Keep your books up-to-date: You won't be able to figure out where the money goes if you don't accurately track it in your accounting software.
• Forecast regularly: A cash flow forecast is your business's financial GPS. It shows you where you are now, where you're headed, and helps you navigate around potential roadblocks.
• Monitor key metrics: Track accounts receivable days, inventory turnover, and cash conversion cycle.
• Plan for growth: The businesses that thrive aren't necessarily the ones with the highest profits—they're the ones that master the art and science of cash flow management.

Cash flow problems are manageable when you understand their root causes and have plans in place to address them. 

And, once you’ve started improving your cash flow, you’ll want to maintain it. One of the simplest ways to do this is by actively forecasting your cash position, and revisiting your cash flow statements on a regular basis.

The bottom line is that cash flow doesn’t have to be complicated. Start the process of better cash flow management by taking the time to regularly update your books and reviewing your cash position, your up-coming obligations, and your past-due customer payments. Once you have this routine in place, you’ll be in a position to create a longer-term cash flow forecast that will unlock strategic growth in your business.

Noah Parsons

Before joining Palo Alto Software, Noah Parsons was an early Internet marketing and product expert in the Silicon Valley. He joined Yahoo! in 1996 as one of its first 101 employees and become Producer of the Yahoo! Employment property as part of the Yahoo! Classifieds team before leaving to serve as Director of Production at Epinions.com. He is a graduate of Princeton University. Noah devotes most of his free time to his three young sons. In the winter you'll find him giving them lessons on the ski slopes, and in summer they're usually involved in a variety of outdoor pursuits. Noah is currently the COO at Palo Alto Software, makers of the online business plan app LivePlan.