A cash flow crisis isn’t always a symptom of company downfall. Businesses often grow rapidly and overextend themselves. That said, it’s a huge red flag to have no funds for supplies and operations. Here’s how to efficiently resolve this risky situation.
Talk to your creditors
If you are having difficulties making your payments on time, many creditors will more than likely be understanding. Talk to them and see if they would be willing to accommodate you to some extent. You do have some time before your bank, lender, etc. resorts to enforcement. Contact them first and propose a specific date or date range by which you could make the payment.
Remember, it is in every institution’s best interest to maximise their returns. They will typically prefer to wait a bit for your payment over taking time-consuming and costly enforcement steps. As long as you are polite and reasonable, you can safely count on some measure of flexibility.
Speed up your receivables
If you want your business strategies to work long-term, you need to have a plan in place for when your cash flow needs a boost. After all, it wouldn’t do to scramble for loans or negotiate with creditors every time your finances hit a snag. There are a few different strategies can fall back on to accelerate the income:
Improve your collections methods. Start chasing your debtors as soon as any payment is late. Better yet, prevent lateness. Send out payment reminders before the due date, then move on to direct phone calls. Enlist debt collectors if you need to. Imposing late payment fees and interest charges is another viable method.
Send out your invoices sooner. Don’t postpone when there is no legitimate reason for delays. Send the invoice as soon as the product is delivered or the service rendered. If this leads to invoicing on many discrepant dates, utilise appropriate software to keep track.
Ask for upfront payments. Request your customers pay you a part of the invoice in advance. This can be a fixed fee or a percentage of the total. It’s a great way to improve your cash flow, as well as to protect yourself. A customer who already has money in the matter is more likely to follow through on the rest of the payment in a timely fashion.
Offer incentives. This is usually done with a small discount (around 3%) if the invoice is paid on receipt or within a short time span (say, 7 days). It does improve your company’s cash flow but comes at a cost to your overall profit, so you might skip this strategy if your finances are in a genuine crisis.
Explore fast financing
When your cash flow crisis is also an emergency, look into short-term financing. The most common choices are relying on credit cards and business overdrafts. However, those options may not be available to you. Maybe you already hit your lending limits or you were refused these solutions at some prior point. In that case, the alternatives are invoice or debtors financing services and business loans.
Business loans are the more traditional route, but they might not be quick enough. Loans typically take some time to arrange properly. Not to mention, the repayments will keep straining your cash flow down the road.
Debtors/ invoice financing is better suited to emergency funding. It lets you access the funds in your unpaid invoices early. Instead of waiting the standard 30, 60, or 90 days, you sell your invoice to the financier. They pay you a part of that sum (usually 70 – 95%). When the customer pays the original invoice, you get the remainder of your payment, minus the financier’s service fee.
Minimize expenses
This is one of the most basic ways to save your startup from running out of money. Avoid dramatic cost-cutting, because it could alarm your clients and destroy employee morale.
Instead, make minor adjustments that will stack. Examples include:
- reducing company travel
- freezing overtime
- canceling subscriptions
- stopping discretionary spending
The biggest expense of any company is payroll, but don’t touch it unless you absolutely must. Even then, there are some ways to avoid or postpone redundancies:
- shorten the work week
- cut perks or reduce benefits
- temporarily convert full-time to part-time
Photo by regularguy.eth on Unsplash
Boost your revenue
If business is still mostly alright but you could do with a cash boost, find ways to increase revenue. One great approach is a flash sale. It’s particularly effective for culling excess stock. That increases your available cash while reducing carrying costs.
In the long-term, increase your prices. This will insulate you against future cash flow crises. Find a balance: you need to ensure that the resulting profitability will cover any losses incurred by losing cost-sensitive customers.
A cash flow crisis can strike both small entrepreneurs and large businesses. That said, it’s not always a symptom of a struggling company. Sometimes it just means you grew a little too abruptly. Employ these strategies in the short-term and quickly get back on track.
By Mike Johnston
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