The entrepreneurial journey is full of ups and downs, from production delays and marketing glitches to technical faults. However, the only thing that could shake your company’s foundation is a cash flow crisis. So now, the question is, what fuels cash flow problems?
Most entrepreneurs judge a company’s performance by analyzing sales and profits. Unfortunately, your business could be achieving targets but still not have sufficient cash. That happens due to high dependence on credit sales. Even though customers are buying from your company, they aren’t paying on credit, leading to a cash flow crisis.
So, how to deal with the lack of cash? First, business owners need a strategy to handle cash flow shortages. Then, you must adjust the business plan to maximize profit margins, opt for working capital finance, and restructure payments. Then, once your accounts start running like clockwork, you can maximize cash usage to grow the business.
Here we have highlighted six strategies to survive a cash flow crisis.
- Reevaluate Business Operations
One of the reasons why cash falls short is because of substantial expenses. Therefore, you have to review the cost structure to find gaps and identify parts that can be outsourced. For instance, outsource this task to a third-party vendor if the logistics team consumes massive profits. It will allow you to get the job done without providing salary and benefits. But before you jump on this bandwagon, you must brush up on your accounting skills.
Perhaps, you can take a few short courses or get a certification as a public accountant. You can prepare through Wiley CPA Review kits and qualify for the exam. Besides building accounting knowledge, it will improve your business acumen. You will be in a better position to analyze operations and implement strategies to overcome cash flow problems.
- Accelerate Receivables
Truthfully, the quicker money begins to flow into your business, the sooner you can overcome cash flow problems. And this would only happen if your customers paid timely. For that, you can use a few strategies to accelerate your receivables.
- For new customers, request a deposit or partial payment up-front. It will decrease the likelihood of bad debts while ensuring you have some cash in hand available.
- Adjust the management of your receivables by sending invoices on time. Drop the invoice the same day as soon as you deliver the products or services. However, if the customer still doesn’t pay, you can send reminders before the due date.
- Business owners can also offer cash discounts on early payments. For example, if a customer pays within ten days of its purchase, they can receive a 2% cash discount. It will encourage clients to pay timely, helping you overcome cash flow problems.
- Lastly, make it convenient for clients to pay by offering several payment methods.
- Restructure Payments & Collections
Often, businesses have to sell off their assets to pay vendors, but that is not the correct approach. Instead, you must restructure your payments with the vendors to create a more balanced income for your business. Maybe, you can align the dates with your invoices. For example, if a client pays you on the 5th of every month, schedule the payment for the 6th.
Similarly, you can also consider restructuring payment costs. You will have to look around and meet new vendors that can provide raw materials at better prices. However, if you don’t wish to switch vendors, use the information from competitors as leverage to get better pricing.
Further, you can restructure your payroll as it can lead to substantial cost savings. For example, switch to a less frequent pay schedule if you pay wages weekly. It will save the administrative costs of collection and verifying payroll information again and again. In addition, direct deposits will also stabilize the withdrawals, improving cash flow.
- Explore Borrowing Options
Undeniably, a lack of cash can halt business operations. One way to solve this problem is to find a way to bring money into the business. You can do that by acquiring a business loan or working capital finance. It will allow you to inject cash into the company through which you can pay creditors and other operational expenses. Besides this, you also take credit card advances to cover petty cash expenses necessary for running the business.
However, only resort to debt if no other option is available. The added interest expense due to loans can trigger current liabilities. Hence, make sure your business is financially sound to repay the credit; otherwise, it will worsen the problem.
- Monitor & Slash Expenses
Believe it or not, you can achieve significant savings in a short time with a few adjustments. For starters, you can monitor energy consumption. It might be possible that you are paying from computers and printers that no one is using. Likewise, look into employee expense accounts. Finally, you can pause expensive travel and entertainment by switching to video conferences.
Besides this, you can also let employees work from home to save up on utility expenses. Again, slashing these costs will reduce the outflows from your business, helping you stabilize cash flow.
- Adjust Your Inventory
Most entrepreneurs accumulate inventory, thinking, what if the demand increases. It might seem like a wise approach but not financially viable. All the inventory stocked up consumes storage space and ties up cash. Therefore, check your stock to identify items that aren’t selling well since they are hurting cash flow. After all, the money you have spent to obtain them isn’t converting into revenue. Thus, you can sell these items at discounted prices to get some cash in hand.
Moreover, invest in a reliable inventory management system. It will allow you to predict demand, based on which you can optimize the production lines. It will also keep the inventory levels in check, saving your business from cash flow problems.
Cashflow problems can hit any business at any time. A few of your clients run late with the payments, and your business can be on the verge of falling apart. That’s the problem you have to fix. Besides reducing dependence on clients, you have to negotiate better payment terms. Likewise, you must minimize outflows while maximizing inflows through receivables and inventory. These few strategies can mitigate monetary problems, saving you from the cash flow crisis.