Managing a Cash Crunch
There are many reasons why small businesses experience sudden cash flow crunches. External factors could have caused a sudden drop in demand; local or global impacts on what customers buy which you have no control over. Pandemics, earthquakes, floods, new inventions, change in legislation can all impact your sales.
Other causes of a cash crisis can include:
- A major customer hasn’t paid on time. Implement stricter credit control and better debt collection procedures. Contact customers to ensure you have the right purchase order and the invoice has been sent to the right person. Check if your contact has gone on vacation and forgotten to process your invoice (it does happen)
- A rise in the cost of production has eroded your profit margin. Try and source less expensive materials or supplies or decide if you need to raise your price. Monitor your gross profit margin on a more regular basis for any further profit slippage
- Your business overhead has increased. Identify specific expenses and see how you can reduce them. Check your net profit margins to spot any out-of-proportion overhead increases so you can take action
- Your business is growing quickly. There’s usually a time gap between selling goods or services and getting paid by customers. Meanwhile there are bills to pay. See if you need to slow down: don’t accept every new job or order that comes in, select only the most profitable and those that pay on time
- Sales have been slower than predicted. Review your marketing plan and sales campaigns. Alternatively, if you can’t see any future improvement in sales, make sure your business is still viable by going back to your original feasibility plan to see what went wrong.
There may be other causes such as the loss of a major contract or you bought a large asset at the wrong time and you now need that cash reserve for working capital. In each case, understand the cause and the action you’re taking to avoid repeating the crisis, such as diversifying your customer base or using your cash flow forecasts to time purchases more appropriately.
If you do find yourself in a cash crisis, there are a number of funding options to consider, financing options through a bank to finding a business partner. The relative attractiveness of each option will depend on the size of your cash flow shortfall and how long you’re likely to need the cash.
Find internal funds
Before you look for external sources of funding, see if you can free up cash from within your business, for example:
- Consider a refinance of your existing debt
- Offer customers a discount for early payment or ask them to pay up front
- Ask customers to pay by credit card now rather than invoice for payment later
- Hold a sale of surplus or slow-moving stock to raise cash
- Upgrade to a better cash management system
- Ask suppliers to take back excess stock and give you a credit or longer payment terms
- Sell under-used assets and rent the equipment only when you need it
- Downgrade or sell vehicles to raise capital and lease them back with monthly payments
- Reduce your drawings from the business until revenues improve.
Your accountant and advisors may be able to suggest other ways to release the locked-up cash in your business.
Apply for a bank loan
If you need a business loan and have a good credit history, consider a higher line of credit or access to a business loan. If you’re going to need a significant amount of money, you’ll likely have to present a detailed business plan and financial forecast.
Take on partners and investors
A business partner might be a source of capital. There are advantages but also pitfalls to taking on a business partner, so get expert advice first from your accountant and your lawyer; they may also know suitable investors. Be aware that you’ll need to share the ownership of your business if you go down this path.
Ask family and friends
You could ask family, friends or business colleagues to help out with a temporary or long-term loan. It’s best to put the agreement in writing and get everyone to sign it, so that both sides are clear on an agreement. Be aware that this sort of agreement could strain personal or working relationships if things go wrong, so treat it as a last option.
A cash crisis is stressful for any business owner. Take a deep breath and be reassured that you do have several options available. You’ll feel better about your situation when you take immediate steps to pull your business through what will surely be a short-term cash flow crunch.
Don’t wait for a cash crunch. Fine tune and improve your business as you go and build a cash reserve to buy you time when you need it. Update your cash flow forecast to make sure you are working with fresh numbers to see exactly how much money your business requires to stabilize cash flow.
Note that the resources listed here are meant solely as overviews and helpful information. Please consult experts regarding your specific security needs for your business.