Many businesses collapse due to cash flow problems. According to a recent study conducted by Intuit with Wakefield Research, about 61% of small businesses worldwide struggle with cash flow.
Cash flow keeps a business running. It pays the bills and salaries, buys supplies and helps with investments. A cash flow crisis happens when there’s more money moving out of the business than what’s flowing in. With the current COVID-19 pandemic, this situation has worsened for many small businesses. Here are some strategies you can consider if you’re feeling a cash flow crunch:
When there’s a cash flow shortage, examining the business plan is a good place to start. If there’s a shortage, you must know why this happened and where you can improve to increase profit margins. This is not just to address the current shortage but also to help manage the same situations in the future.
One way of adjusting the business plan is to determine which areas are the most and least profitable. There may be changes in trends and market demands. The business then needs to adjust its focus and adapt to accommodate the new needs of the customers. Whether it’s on the sales and marketing strategies or pricing structure, changes must be considered to increase revenue.
A lot of businesses experience an ‘invoice lag’ – meaning it takes a long time to get paid by customers. Being prompt on collections and taking necessary follow-up actions can make a substantial difference if there’s a cash shortage.
Expediting receivables is key to overcoming this common issue. This may be addressed by sending invoices early and more frequently, asking new customers for a deposit or partial payment upfront, and actively following up on past due clients.
In addition, consider if your business’ collection process can be improved to make it easier for the clients to pay. For instance, a payment feature may be added to the businesses website, or mobile payments could be enabled.
Funding is usually required immediately to overcome a cash flow crisis. In this instance, business owners often consider short-term finance, like a caveat loan. With this business loan, the funding is usually available within a few days from application. In Australia, caveat loans and other types of business loans are widely available from a variety of lenders. However, before you take out any loan, make sure you understand the interest rates and that you’re dealing with a reliable lender. A good way to assess a lender is to take a look at their reviews, like Mango Credit Reviews. This private lending institution has two decades of reputable service and has helped thousands of Australians to get out of the bind. It’s important to find a trusted lender so you won’t find yourself in bigger debt and worse problems in the future.
In a business, every cent must be spent well. This is especially true when there’s a cash crunch. During such a time, you need to prioritise the company’s expenses and cut unnecessary overheads. Any cash outflow that’s not strategic or not needed should be removed. Spending must focus only on the costs that keep the company operational and help it generate revenue.
5. Reassess your business operations
A cash flow crisis could mean there’s an operational gap somewhere in the business. Reviewing the cost structure will help to see if there’s an area that can be modified to increase savings. For example, hiring part-time staff during slow periods or outsourcing specific functions to freelancers and third-party providers rather than having full-time staff. Conversely, additional hires might be required to increase revenue and profits. It’s best to discuss these strategies in conjunction with an accountant.
Do you have unused equipment or furniture that’s non-essential? Liquidating non-essential assets can be a temporary fix. Doing so can help add to the cash flow. You may feel like you may need those assets in the future, but you can always find something similar at a later date.
Typically, buying new equipment for the business is cheaper over the long term. But if there’s a cash flow crisis, it can be costly. Updating a piece of outdated equipment may require instant cash, which is not readily available. Alternatively, leasing equipment can be a good option to lessen the short-term financial burden and reduce costs.
Analysing customer demands and adjusting purchasing can help manage cash flow when there’s a shortage.
When the business is short on cash, an inventory review should be done in order to adjust what’s needed. For example, items that are not selling well can hurt the cash flow as they are not being converted to sales. In this situation, you might consider selling them for discounted prices and not buying additional stock after emptying them. They may have been sold at a lower price and may reduce your profits, but you increase your cash resources. Alternatively, invest more into buying stock that sells well.
When there’s no plan about handling a cash flow shortage, a business may fail. That’s why business leaders or owners must be ready to take action and make difficult decisions. In addition to these eight strategies that can help stabilise cash flow, preparation and prevention are two best practices business owners must follow at all times.