A business owner reviewing mistakes he can avoid in a high-inflation economy.

5 Cash Flow Mistakes Business Owners Should Avoid in a High-Inflation Economy

Last Modified : Feb 07, 2024

Fact-checked by: Bruce Sayer

A healthy cash flow is one of the most basic indicators of business performance. And while its always important to monitor your cash flow closely, keeping accurate cash flow tracking in a tough economy is essential.

In an economy where every dollar’s value is under siege by stubbornly high inflation rates, businesses face an uphill battle in maintaining healthy cash flow.

In fact, since March 2022, the Federal Reserve has raised the national interest rate ten times to help calm current inflationary forces. As a result, businesses face rising debt-financing costs on top of spiking costs of supplies, payroll, and more.

These economic conditions combine to challenge the health of a business’s cash flow. Without a close watch on this core business function, your ability to keep cash moving and bills paid may be threatened.

Read on to learn five cash flow mistakes business owners should avoid when facing our current high-inflation economy.

1. Ignoring Accounts Receivable Aging

If accounts receivable aging isn’t factored into your business’ accounting practices accurately, you may overestimate cash inflows. As more businesses delay invoice payments due to their own financial challenges, your accounts receivable aging may be changing for the worse. A recent survey of U.S businesses found that over 80% of invoices were paid late in 2022 as inflation and rising interest rates batter businesses’ accounts payables.

Regularly monitoring your customers’ payment history and your company’s DSO (days sales outstanding) to track trends will help you keep on top of this critical cash flow metric. Watch for significant changes that can affect your cash flow.

2. Ignoring the rising cost of debt

Sticking with debt repayment plans in 2023 can be costly. Rising debt-servicing costs could eat up significant amounts of capital if left unchecked.

Businesses that acquired significant amounts of debt while interest rates were low may now struggle to meet their financial obligations. With multiple interest rate increases, your rising cost of servicing debt can eat into your cash flow, which in turn impacts your ability to acquire supplies, finance operations, and meet payroll.

Be sure to factor in the changing costs of debt-servicing into your business’s cash flow strategy.

3. Misinterpreting positive cash flow

Positive cash flow is typically an indicator of good business health, however, there are times when positive cash flow can mask harsher realities lurking under the surface.

For example, if your positive cash flow is a result of one-time event, such as selling off assets, receiving an insurance settlement, or securing a large investment, that positive cash flow report may not be sustainable once that event is past. These expenses do not require an immediate cash outflow, but they reduce the overall profit ability even if your cash flow appears positive.

Carefully track these positive events to ensure one-time injections of capital aren’t incorrectly identified as contributors to regular positive cash flow.

4. Failing to create a cash flow forecast

Forecasting your cash flow is an essential part of day-to-day decision making. another key strategy to improve your business’s financial health. A cash flow forecast can help you predict future cash coming into your business and determine when funding gaps will occur. However, this type of planning can be overlooked while business owners are forced to focus on more immediate concerns prompted by a challenging economy.

The goal is to create predictable cash flow, which you can use to plan an accounts payable schedule: if you can forecast months with irregular cash flow, you can better plan whether to acquire funding to bridge the gap or delay a due payment to ease the financial burden it might place on your ledgers.

5. Not having a backup plan

One of the more significant lessons the pandemic has taught businesses is to expect the unexpected. An unexpected tax bill, major repair, or losing a significant customer could deplete your cash reserves and disrupt your monthly cash flow.

Without a backup plan to address unexpected cash flow hits – such as a source of back pocket funding or assets you can quickly sell — a cash flow crisis could quickly become an existential threat to your business’s health.

More cash flow strategies

Businesses that fail to prepare accurate forecasts, neglect to acquire emergency funding, ignore accounts payable, or overestimate revenues could face serious consequences and begin a slide toward insolvency.

However, current economic conditions can challenge a company’s cash flow despite business’s best efforts.

Alternative financing offers quick, dependable funding options for businesses needing additional funds to keep cash flow positive. Here are a few of the notable benefits alternative financing provides to businesses looking for a backup plan to avert a cash crisis:

– Covenant light funding agreements. Alternative financing agreements generally have fewer restrictions than loans from traditional lenders. With minimal lender oversight, business owners are freer to execute strategic decisions and pursue growth opportunities.

– Expanded credit limits. Alternative lenders leverage untapped asset strengths to access additional sources of credit. Unlike many traditional credit arrangements, alternative lender credit limits can expand as business volume and asset values increase.

– Access more capital in multiple ways. With flexible financing, numerous funding options exist to access the capital you need. Popular alternative financing options include asset-based lending and invoice factoring.

– Fast and easy qualification. A business possessing quality assets such as accounts receivables or inventory can quickly and easily qualify for alternative business financing. The qualification process and first funding can be arranged in a few days or weeks.

Tip: Explore more on how alternative financing can get your business paid faster here

ABOUT eCapital

Since 2006, eCapital has been on a mission to change the way small to medium sized businesses access the funding they need to reach their goals. We know that to survive and thrive, businesses need financial flexibility to quickly respond to challenges and take advantage of opportunities, all in real time. Companies today need innovation guided by experience to unlock the potential of their assets to give better, faster access to the capital they require.

We’ve answered the call and have built a team of over 600 experts in asset evaluation, batch processing, customer support and fintech solutions. Together, we have created a funding model that features rapid approvals and processing, 24/7 access to funds and the freedom to use the money wherever and whenever it’s needed. This is the future of business funding, and it’s available today, at eCapital.

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eCapital Corp. is committed to supporting small and middle-market companies in the United States, Canada, and the UK by accelerating their access to capital through financial solutions like invoice factoring, factoring lines of credit, asset-based lending and equipment refinancing. Headquartered in Miami, Florida, eCapital is an innovative leader in providing flexible, customized cash flow to businesses. For more information about eCapital, visit eCapital.com.

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