Small Business Cash Flow Problems Still Not Declining

Many small businesses continue to experience cash flow problems – the majority, in fact, according to a survey by the Discover Small Business Watch.

That cash flow is an issue right now for small businesses might sound obvious to most of you that run your own businesses, but a worsening trend might not be. So here’s a chart that shows what has been going on with small business cash flow over the past three years.

The figure plots the percentage of respondents to the Discover Small Business Watch monthly survey of a random sample of 750 small business owners who answered “yes,” they are experiencing temporary cash flow issues. Although there has been a slight down tick over the past two months, the chart shows a (noisy) trend towards an increasing share of small business owners experiencing these problems. (The thick blue line is the actual data; the thin black line is the linear trend plotted from it.)

Discover Small Business Watch Cash Flow

I tried to see whether other patterns fit the data better than the upward linear trend. Unfortunately, they don’t. An increasing share of businesses experiencing temporary cash flow problems is closest to what has actually happened over the past three years.

Many economists believe that the Great Recession has ended and the economy is now growing again. While that might be true, it doesn’t appear that the recovery is strong enough or broad enough to have fixed the cash flow problems in the small business sector, at least not yet.

18 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

18 Reactions

  1. Given the ease of credit over the last few years, do you think that some of this trend could be explained by poor cash management skills? I would suspect that at least some newer business owners may have never had to worry about cash flow because they always had a credit card before to bail them out.

  2. Robert’s point makes a lot of sense, but I also wonder if this survey is really meaningful since it doesn’t specify how cash flow is being measured.

    In my experience, small business owners often rely on seat of the pants finances, and although some have a good sense of it, nothing replaces tried and true accounting methods and frequent check-ins.

    Susan Martin
    http://www.business-sanity.com

  3. There are a lot of things that could be contributing factors — cash management skills, unavailability of credit, slow sales, etc. It’s tough to pinpoint via the limited information. But one thing is for sure, no matter what the economy a certain subset of small businesses will have cash flow issues.

  4. I totally agree, Scott.

    “Officially,” the recession is supposed to be over. Most folks are not feeling it, though.

    If cash flow problems persist for small businesses, new employees won’t be brought on board. Not good.

    The Franchise King

  5. I have spoken to several small businesses who rely on credit lines to maintain cash flow. In come cases, their line of credit has been reduced or even revoked. (even with perfect credit history)

    Unfortunately, the latest lending proposal from the White House won’t fix this issue. In the short term, I recommend getting a Plum Card and using the 90-day deferred payment option.

  6. Definitively Scott after a huge impact on the economy where big corporations cancel and put on hold huge projects, letting go a big number of employees, has had a substantial impact on cash flow of migrant workers and therefore to Small Business entrepreneurs.

    Even with the actual ramp up of the Economy the recovery slope of this ramp is very slight, due to conservative decisions of employers in these circumstances, who are trying to minimize the risks until the economy reaches its stability. This situation is clearly reflected in the results presented in your chart. Without considering the experience of small businesses in managing cash flow under this scenarios.

  7. This article shows, small business owners aren’t getting any smarter. The fact is that these types of downturns are good for the economy like a wildfire is good for the forest. Those that aren’t practicing good money management skills are going to fall by the wayside. Those that are, will survive, albeit with a few battle scars. The banks are still lending to well run businesses that entered the downturn with good practices. In my book, In the Black – Nine Principles to Make Your Business Profitable, I share a few simple tips on how to keep cash king including not intermingling personal and business funds, leveraging your money effectively through vendor terms, sticking with a well thought out budget, and starting a business with 50% equity capital. These simple techniques can keep a business owner out of the poor house.

  8. John — If a small business is regularly depending on a line of credit for cash flow, they have big problems that need to be resolved — marketing, sales, or operations issues to name a few.

  9. As a small business owner, cash flow problems come from clients doing fewer projects, slow months, slow payers and a few deadbeats… all symptoms of our slowed economy. We don’t rely on credit lines or credit cards and so watch the bottom line very carefully. With more work from our clients and new business development, our cash flow will recover. Ready, willing and able to work more!

  10. Great thoughts Scott
    One of the trends that I see in small businesses is the fact that small business owners only look at their profit and really don’t talk about their working capital at all. By working capital I mean inventory, debtors and creditors.
    So much money hides in the business because working capital is not a topic of conversation at all until there is a real crisis.
    If small business owners would talk about their working capital instead of focusing solely on making a profit then over time that added emphasis may well assist in seeing a decline in cash flow issues in small businesses

  11. Someone above wrote >>Those that aren

  12. I must have written more than this will accomodate — my comment was truncated and oddly garbled, but the point is this: Business owners do need to take responsibility for what they do, but they are not stupid; they know that cannot control everything, and in this brutal economy, having one’s business fail doesn’t NECESSARILY mean he was doing something wrong, in regard to cash management or anything else.

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