It has been estimated that insufficient cash flow is responsible for around eighty percent of business failures.
These cash flow crises could be due to rising costs, declining sales, a massive unavoidable expense, or a combination of factors. In worst case scenarios, you could end up not being able to pay your payroll or other essential bills due to a lack of cash, resulting in a shut down. Here are five tips for pulling your business out of a cash flow crisis.
Focus on the Money You’re Owed
Cash flow is based on both your income and your outgoings, and a good way to handle a cash flow crisis is to focus on getting your income up. Before you try to increase sales, accelerate your receivables. Send reminders to those who bought your product that payment is due.
Also make sure to refuse to accept further orders from those who haven’t paid for the last one and contemplate sending slow payers to collections. Create a system for sending invoices as soon as someone has placed their order; the sooner they’re billed, the sooner you get paid.
Accelerate Your Receivables
Another thing you should do is consider accelerating your receivables. Shorten the length of time customers have to pay for items.
For example, require payment in 30 days instead of 90. You might incentivise clients paying up front by giving them a modest discount for doing so. Or you could accept pre-orders, allowing people to pay now in exchange for priority shipment when your new release or seasonal products are available. Start asking new customers for partial payment or deposits.
Adjust Your Business Plan
Also make sure that you re-evaluate your business plan. Calculate the real costs of delivering every product or service relative to what you’re charging. Be willing to cut products and services that are costing you more than they bring in. Find ways to cut expenses without sacrificing quality.
For example, you might want to drop customers who are generating a disproportionate number of returns or service calls. You might need to change your marketing plan, your distribution network or your very business model. You may also need to shift from providing a product to providing services related to that product.
Businesses must have control of their books and know key business metrics in order to weather a cash flow crisis. You may need to implement an inventory or financial management system in order to actively prevent cash flow problems in the future.
Consider Borrowing Options
Sometimes you won’t be able to raise cash by pursuing past-due invoices or selling items at a deep discount. In this case, the only remaining solution is to sell equity or take out a loan.
Research the available loan options as soon as you see an impending cash crunch so that you don’t end up taking out the most expensive loan available. For example, small business owners should learn about business loans before they just charge their business expenses on a credit card. You can find short term loans that you can repay monthly or weekly for up to a year. Doing so could buy you time to increase sales, cut expenses, or make other necessary changes.
Review Your Budget
Every business owner should scrutinize their budget on a regular basis. Make sure that you review every line item and cut unnecessary expenses. This could be services that you’re not fully utilizing, people who aren’t contributing to the bottom line, or products that aren’t selling. Prioritise expenses, and if you’re in a crisis, only pay the most important budget line items. For example, you should first pay the suppliers who provide what you sell and pay the people who keep the business going.
Conclusion
Cash flow management is a challenge for every business owner. Regularly check your business metrics, and if you find yourself in a cash crunch, take action as soon as possible so you can get back on track.
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