It is not unusual for a business to experience cash flow problems at a particular point in time. Cash flow shortage happens when more money is flowing out of a business than is flowing into the business. This means that during a cash flow shortage, you may not have enough funds to pay salaries or cover other operating expenses. According to Business Insider, 82 per cent of businesses fail due to cash flow problems.
In the event of a cash flow crisis, all you need to do is take action to save your business from an untimely death. Here are seven steps to take:
Adjust your business plan to improve profit margins
Once a cash flow crisis occurs, you need to determine why you encountered a cash flow shortage in the first place. You must assess whether it will be a recurring problem and put a plan in place to handle future shortages.
Use job costing to assess your business’ profit and loss statements and profit margins, based on individual categories within your company (jobs, clients, employees, events, marketing strategies, products and services) to determine which areas of your business are the most and least profitable. This will help you adjust your business plan to focus on services that generate the most profit. Let go of clients who might be costing you more money than you realise, optimise your pricing structure and also identify areas of waste or unnecessary expense to remove from your operations.
One way to solve a cash flow problem is to find a way to bring money into the business. You can do this with a business loan or a credit card advance
Accelerate receivables
Try to repackage your products and encourage customers to pay upfront. The more irresistible your product is, the more clients would want to pay down.
Ask new customers for a deposit or partial payment up-front, rather than billing the entire amount due in a single invoice after services have been rendered or products have been delivered. Also send your invoices early. The sooner you send an invoice, the sooner you will receive payment.
Focus on your past due accounts. You can encourage clients to make partial payments to make it easier for them. Remember, in a cash flow crisis, every naira counts.
Negotiate your payables
If you can delay or reduce the amount of cash flowing out of your company during a cash flow crisis, it will help reduce the strain on your working capital. Be honest with your vendors to negotiate payments or to inquire about delaying payments. Although some might be unwilling to accept, most vendors to whom you have been loyal will be flexible and willing to work with you during a tight situation.
Consider borrowing options
One way to solve a cash flow problem is to find a way to bring money into the business. You can do this with a business loan or a credit card advance. Before you take on business debt, however, be sure you understand the interest rates and have considered all other options and are not making a decision that will simply delay the problem for another day.
Raise investor capital
You can also increase your business’s working capital (and also bring in a new business partner) by selling equity. Like taking on debt, however, be sure you truly want or need to sell a piece of ownership in your business to solve a cash flow crisis. Also be careful regarding the type of investors to whom you decide to sell and with whom you choose to partner. Do not let the pressure of a cash flow crisis lead you to make poor decisions that you may regret later.
Slash expenses
As a rule of thumb in business, you should always scrutinise every single kobo that leaves your bank account. Eliminate all unnecessary expenses and only spend on the costs that keep you operational and generate revenue.
Sell non-essential assets
In addition to cutting non-essential expenses, in a cash flow crisis, you can also off-load non-essential business assets. It is an effective and quick way to raise some cash when you are in a fix.
•References: www.growthforce.com; Dr. Mabel Akanji
