Human beings need food to survive. Likewise, a business needs a constant flow of cash to succeed. Not only small companies but large companies also face a cash flow crisis. You may think obstacle in cash flows is an evident sign of a struggling business, but the opposite can be a fact. The fact that entrepreneurs grow quickly and outstretch themselves financially is one of the significant reasons for running out of money.
Sometimes cash flow problems hit businesses for numerous other reasons such as diminution in sales, unpaid dues, and higher expenses. Poor cash flow can cause wreak havoc on your business. More than 75% of companies, including large companies, face failure because of poor cash flow management. It can be deleterious for entrepreneurs who have started their venture after taking out loans and eventually have fallen short of cash.
Whether you have a small business or a large company, the following tips can help you survive a cash flow crisis.
Convince creditors to extend payment time
When you face a shortage of cash, you will likely avoid payment to your creditors, but this approach worsens the situation. Creditors also need money on time. When you face cash shortfalls, you should immediately talk to your creditors if they can allow you to have a buffer period to pay money.
Every creditor wants to maximise their returns, so they may be willing to wait for a couple of days instead of wasting money and time taking enforcement action. This strategy will help you retain cash for a few days more without the breach of the agreement. As a bill is generated, you should avoid paying dues until the due date. If you have a history of paying bills on time, some vendors may be willing to negotiate an extension of a few days or weeks. You can also ask your creditors to renegotiate a payment structure.
Take hold of your spending
When you are in a tight spot, you should examine your expenses. Take a statement from your accountant. Find out whether all expenses you made were urgent. It is paramount that you track your business expenses. You will likely discover costs that may have taken a toll on your budget. Try to figure out where you can cut down on. Make sure that monthly spending does not add up due to non-essential expenses. The more you whittle down, the more money you can put back into your cash flow.
For instance, you can reduce the amount of company travel by opting for remote meetings using video conferences. If you have a prolonged cash flow crisis, you should try to cut payroll. Lay off employees if you can manage without them. You can also make your employees redundant temporarily, or you may ask them to work part-time. Cutting down on employee benefits can also help you overcome the blow.
Find out ways to boost revenues
The most common strategy to have a quick injection of cash is to increase the prices of your products and services. It terrifies many entrepreneurs because you may lose your customers to your competitors. You need to strategically revise the prices of your products and services. Compare your inventory cost with the price you charge. If your sales improve, it can be a better idea to boost your revenues and get out of the cash flow crisis.
Another method to improve your revenues is reducing the inventory cost. Having a slow-moving inventory can have a negative impact on your cash flow. Find out how long it takes to receive goods after placing an order and when you deliver it to your customer. If you can manage to place an order less frequently, go ahead. This can help you reduce your inventory cost. The lower the inventory cost, the better it is.
Push your customers to pay early
Unpaid dues are one of the significant reasons for many companies to run out of money. You should ask a percentage of the total payment to be paid upfront instead of asking them to pay the full money after they have received the product.
Keep sending invoices frequently. Send in notifications to remind customers to pay you money. Send invoices as soon as you have delivered a product or service. The sooner you invoice, the sooner you will get paid.
Look for affordable funding options
Even though your clients pay dues on time and you do not incur non-essential expenses, you will likely face cash shortfall. You cannot put off expenses every time they pop up. In this situation, you can look for funding options:
- Business loans: Contact a private direct lender and apply for small business loans in the UK. You can get money without risking your assets because business loans are unsecured. Make sure that you take out these loans with a direct lender that offers lower interest rates.
- Invoice finance: It is a method of borrowing money against dues from your customers. Invoice financing will help you get a proportion of your invoice value, and when the customer pays money, you will get the remainder after deducting the service fee.
The bottom line
Many businesses face a cash flow crisis, but you can avoid them if you strategically keep all options open for a quick injection of cash. You should use a proactive approach for proper cash flow management.