Even with the best laid plans, many small businesses can find themselves in a bit of a cash crunch from time to time; it can be one of the biggest challenges business owners face. But when it does happen, it’s important to act quickly and decisively in order to turn the situation around quickly. The goal is to avoid any long-term financial issues. Remember, proper cash flow management is key for long-term success.
These 7 Strategies To Survive A Cash Flow Crisis will help you come out stronger than ever.
1. Limit Inventory
If you have inventory that is sitting idle, it is burning money. Monitor and limit inventory and keep a close watch on daily activity. This will help you more accurately predict future sales and help you regulate what you have. Having a robust inventory management software system may help you manage these items more carefully, as well.
2. Accelerate Receivables
One great way to bring in cash during a cash flow crisis is to encourage early payments from customers and clients. Offer discounts if they pay in full within a limited time. Many businesses may offer a 2% discount in order to get access to urgently needed cash.
You can also consider offering and accepting pre-orders for items you sell in order to accelerate money in the door; just make sure you can fulfill those orders down the road. If you sell larger items, you may ask new customers for a deposit up front, rather than billing for the entire amount after the product has been delivered or services are rendered.
It may be helpful to work on sending invoices earlier and more often to clients immediately upon completion, rather than waiting to send out invoices on a particular day of the month. This means you will start receiving payments earlier to alleviate the cash crunch.
Focusing on past-due accounts will also help. Start making phone calls and ask past-due clients for partial payments, if necessary. Every penny counts, and helping your own clients who may have cash flow issues of their own with understanding and flexibility means that the likelihood of getting that full payment eventually will increase.
Finally, make it convenient for clients to pay. Offer additional methods of payment, such as credit cards or electronic payment options and ensure invoices are clear and concise with due dates and informatoin your clients need to know.
3. Negotiate Payables
Make sure to communicate with your vendors if you’re in a temporary bind. They may be flexible with you making payments until your situation improves, especially if you keep the lines of communication open and have a strong relationship. It is also in their best interest, in order to get their payment.
It may mean it’s also time to meet with vendors who can potentially provide inventory and supplies at better costs for your business in the long-term. Even if you don’t switch, you can use that information from competitors as leverage to get better pricing from your current vendors.
4. Reduce Expenses
Scrutinize every penny that leaves your business account, especially during a cash flow crisis. Eliminate all unnecessary expenses and make sure the money you are spending keeps you operational and directly generates revenue.
You may want to look closer at your expenses such as rent, utilities, equipment leases, insurance, etc. and consider negotiating with utilities to get lower prices or extended payment terms. Or, shop different companies to see if you can find better rates for long-term savings.
5. Look at Various Borrowing Options
A business loan, credit card advance, or line of credit may be one way to infuse needed cash into your business during a cash flow crisis. However, be sure to understand the interest rates and have considered all options so you don’t create a bigger problem that will need to be addressed down the road.
Having a business line of credit may be particularly useful to bridge a short-term cash flow gap. It can act more as an emergency fund to tap into as long as you use it wisely and pay it back once your working capital returns to normal.
Once a borrower uses a line of credit, payments are made on the borrowed amount until the money is paid back. These are typically lower interest than credit cards, though, and can be more advantageous for tax purposes. It can even help to increase a company’s credit score. Just remember that a line of credit should be used to fill the cash flow gaps, NOT to operate your business.
Another plan is to borrow money before you need it. By opening the line of credit or taking out a business loan when your numbers are good, you avoid the risk of being rejected later. Lenders are less likely to give you a loan if you’ve already been struggling with cash flow for a long time.
6. Raise Investor Capital
By selling equity in your business you can quickly increase your company’s working capital. However, be sure you truly want or need this, as choosing the wrong investor can cause long-term problems. Be very familiar and comfortable with potential new partners and how much equity and control you would be giving them in your business.
7. Sell Non-Essential Assets
Do you have some assets in your business that do not drive revenue and are relatively unimportant? Now may be the time to unload them. If you have outdated assets or things that are simply sitting around, they can provide a good source of extra funds for a one-time cash infusion. While it won’t resolve the cash flow crisis issues completely, the extra cash will help you to move in the right direction.
Remember, by monitoring your cash flow all year long with proper bookkeeping, cash flow problems may be able to be prevented in the first place. Make sure you are looking at regular cash flow projections and cash management reports that may be able to provide early warning signs of trouble.
By being proactive in your cash flow management, your business can achieve long-term success with these 7 Strategies To Survive A Cash Flow Crisis. Make sure you act quickly and efficiently to get back on track, but also use these times to think ahead so you are in a position to thrive in a potential financial downturn. Reach out to us at Knecht Business Solutions if you have any questions about your own cash flow management!