Your profit and loss says you made money last month. So why can’t you cover Friday’s payroll? That’s a cash flow crisis. It means more money leaves your bank account than comes in, for long enough that bills go unpaid. If payroll is due this week, move to what to pay first.
Even profitable businesses can face this problem, and growth often makes it worse. In this guide, we’ll cover the warning signs, common causes, which bills to pay first, and seven ways to improve cash flow in the next 30 days.
What is a cash flow crisis?
A cash flow crisis is a period of negative cash flow that the cash you have can’t cover. Net cash flow is simply the money coming in minus the money going out.
Every business has cash flow issues now and then. A difficult week may be manageable, but when the shortage continues for months, it can put the whole business at risk.
Accountants divide cash flow into three categories: operating, investing, and financing. Cash flow from operations is the one to check. It shows if your daily sales pay your daily bills.
A temporary shortage is a timing problem. A big customer pays 45 days late, and you catch up when the payment arrives. Insolvency is different. It means your debts are greater than your assets, or you can’t pay your debts when they fall due.
Cash flow vs profit: why a profitable business can still run out of cash
Profit records a sale when you send the invoice. Cash counts it when the money arrives. Profit vs cash flow is a timing question, and that gap is why a business can show a profit and still miss payroll.
Here’s an example:
| One month | Amount |
|---|---|
| Net profit on your P&L | +$12,000 |
| Customers who haven’t paid yet | −$15,000 |
| Inventory bought for next month | −$6,000 |
| Loan principal paid (not on the P&L) | −$4,000 |
| Owner draw | −$3,000 |
| Change in cash | −$16,000 |
The P&L shows $12,000 profit, but your bank balance drops by $16,000. Both are correct because they measure different things.
Growth works the same way. More sales means more inventory and more unpaid invoices before any cash arrives. That’s why cash flow problems and growth often show up together.
Early warning signs of a cash flow crunch
The earliest sign is when you stop asking when to pay a bill and start asking which one. Other signs may appear in your financial records before the situation gets worse:
- Your bank balance is lower than your next payroll.
- Invoices older than 60 days keep piling up.
- You pay suppliers late or move money between accounts to cover bills.
- You use credit cards to pay payroll, rent, or inventory costs.
- Sales are increasing, but your cash balance stays the same or keeps falling.
- You can’t estimate what your bank balance will be in 30 days.
These warning signs are easier to spot when your books are up to date. If your accounts haven’t been reconciled, you may be making decisions based on incorrect numbers. Bank reconciliation support fixes that first.
Predawn Accounting helps you get your business in shape for taxes, loans, and
growth. Stop worrying about accounting and speak with a real, human expert.
What causes cash flow problems in a small business?
Most small business cash flow problems are about timing. Customers pay late, expenses arrive early, and the business doesn’t have enough cash to cover the gap.
The Federal Reserve’s Small Business Credit Survey (2024 data) found that 56% of employer firms had difficulty paying operating expenses, and 51% reported uneven cash flow.
Here are the three most common cash flow problems and how they affect a business.
Money that comes in late
Late customer payments are a common cause of cash shortages in the files we review. A client on 60-day terms can leave you covering wages and rent long before the money arrives.
Late invoicing and missed follow-ups make it worse. Many owners hand collections to an accounts receivable management service.
Money that goes out too quickly
Inventory purchases, loan payments, owner draws, and unexpected tax bills can use up cash before revenue arrives. Seasonal businesses often face this problem. Rent and payroll continue throughout the year, even when sales slow down.
Money you can’t see
Unreconciled accounts, uncategorized transactions, and customer payments in Undeposited Funds can make your financial reports misleading, often indicating a need for bookkeeping cleanup. Your reports show cash that isn’t there, or miss cash that is present. Poor cash flow management often starts here.
In QuickBooks, run the A/R Aging Summary, open the Undeposited Funds register, and check your last reconciliation report. These three show where cash is stuck.
What to pay first during a cash flow crisis
When cash is short, pay payroll and the taxes you withheld from it first. Then pay suppliers you need to keep selling, rent and secured loans, other debt, and everything else, in that order.
We call this the Pay-Order Ladder.
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Payroll and withheld payroll taxes: The IRS refers to withheld income tax and the employee share of FICA as “trust fund” taxes because employers hold this money on behalf of employees. Responsible owners can be held personally liable if they willfully don’t pay.
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Suppliers you need to keep selling: Prioritize essential inventory, key software, and delivery services.
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Rent and secured loans: Missing these payments risks eviction or repossession.
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Other debt: Pay the minimums on cards and unsecured loans.
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Other spending: Review subscriptions, nonessential purchases, and owner draws as part of your business budgeting process.
Call before you miss a payment. Landlords and lenders deal with late-paying customers too. Ask for a short deferral or partial payments, and get the terms in writing.
Leases, loans, and tax rules differ, so check your agreements and ask a CPA or attorney before you set your own order.
Not sure where you stand on the ladder? Book a free consultation, and we’ll go through your bank accounts and invoices with you.
7 ways to improve your cash flow in 30 days
Optimizing cash flow starts with knowing how much money you actually have, collecting unpaid invoices, and managing upcoming expenses.
These cash flow solutions for small businesses can help without requiring you to take on more debt.
Find out how much cash you really have: Reconcile every account, then list what you must pay over the next 30 days. The gap is how much cash you need.
Collect faster: Call your five largest overdue invoices this week. Add card or ACH payment links, and ask for deposits on new work.
Negotiate payables: Ask vendors for longer terms or split payments before you’re late. An effective accounts payable workflow also helps you pay on the due date, not early.
Cut costs that don’t earn cash: Unused subscriptions, extra hires, and rush shipping are the usual leaks.
Check pricing and margin: A 15% price cut on a 30% margin product needs 100% more units to earn the same gross profit. Job costing shows which clients and services actually make cash.
Sell what you don’t use: Idle equipment and slow-moving stock can lock up money your business could use elsewhere.
Set owner draws by cash, not profit: Consider reducing or delaying owner withdrawals until urgent bills are covered and the cash shortage has eased. Then start building a reserve.
Should you borrow to cover a cash flow shortage?
Borrow when the shortage is temporary and you can see how you’ll repay it. Don’t borrow to cover a loss that keeps going.
With inconsistent cash flow, your business financing options include a line of credit, invoice factoring, and an SBA-backed loan.
A line of credit can cover short-term gaps, such as waiting for a large customer payment. It won’t fix underpricing or overspending. It only delays them. Invoice factoring, which means selling invoices at a discount, is faster, but it costs more.
SBA-backed loans, including 7(a), 504, and microloans, are offered through SBA-approved lenders and partner organizations. Compare the full cost of each option before you sign.
How to see the next crisis coming
Build a rolling 13-week cash forecast and update it every week. Start with your real bank balance. Add expected receipts by invoice due date, then every known payment. Strategic financial planning can help you develop and maintain this forecast.
Cash flow forecasting challenges usually have three causes. Customers pay later than the terms say, annual and tax bills get left out, and financial records aren’t up to date.
To improve cash flow forecasting, assume customers pay later than expected. Then build three versions: a best case, an expected case, and a worst case.
The best way to avoid cash flow problems is to review your cash position every week, not every quarter.
Efficient cash management is built on three habits: check cash weekly, reconcile monthly, and forecast ahead. These cash management best practices help you keep a strong cash flow even in slow months, and they are the core of good cash flow management.
The SBA recommends keeping track of receivables, payables, available cash, bank reconciliation, and payroll. A bookkeeper can keep these records current. If you need forecasting or a lender-ready model, a fractional CFO covers it.
Get your cash picture before the next payroll
Not sure if you can cover the next payroll? Let’s find out. Our team will go through your bank accounts, open invoices, and upcoming bills with you, and point out where cash is stuck and what to fix first. Book your free consultation today and know where you stand before the next payroll.
Prefer to leave the bookkeeping to someone else? Our monthly bookkeeping services keep your records current and your cash visible.
This is general information, not personalized tax or legal advice. Consult a licensed CPA or attorney about your situation.
FAQs
What should a business pay first during a cash flow crisis?
Payroll and withheld payroll taxes come first. Then pay suppliers you need to keep selling, rent and secured loans, other debt, and everything else.
Should a business borrow money to cover a cash flow shortage?
Borrowing may help only if the shortage is temporary and you can see how to repay it. A line of credit can cover timing gaps. It doesn’t fix a loss that keeps going.
What is the difference between a temporary cash shortage and insolvency?
A temporary shortage is a timing gap that incoming payments will close. Insolvency generally means a business can’t pay its debts when they fall due. If you can’t see a way to resolve it, talk to a CPA or attorney.
How much cash reserve should a small business keep?
Start with one month of fixed costs, then keep adding as cash allows. Seasonal businesses need more.
Meet Muhammad Aqib: Our Expert in Financial Planning and Analysis
He is the founder of Predawn Accounting and has more than six years of experience helping small businesses maintain organized financial records, improve reporting accuracy, and better understand their financial position.
He is a qualified Chartered Accountant from ICAP Pakistan, holds a BS in Accounting and Finance, is an ACCA Candidate, an FMVA Certified professional, has also earned a Financial Planning and Analysis certification from the Corporate Finance Institute (CFI) and is a Certified QuickBooks ProAdvisor with experience working across industries, including real estate, construction, e-commerce, SaaS, and marketing agencies.
Before founding Predawn Accounting in 2023, Mr. Aaqib worked with businesses across multiple industries, doing bookkeeping, financial reporting, financial modeling, fractional CFO, and other projects. He has also completed financial projects that helped businesses raise funding and improve financial operations.
