Sometimes, a small business faces a cash crunch despite our best intentions. A cash flow shortage happens when more money flows out of a business than is flowing into the business. That means you might not have enough money to cover payroll or other operating expenses. Therefore, it is crucial to act quickly and decisively to turn around the situation and avoid any financial calamity. These are a few tips that could help your business survive a cash shortfall.
Improve profit margins by adjusting your business plans
When faced with a cash flow shortage, you should closely inspect your business plan, processes, operations, expenses, and taxable income. It is essential to determine WHY you have encountered a cash flow shortage. If it develops into a recurring problem, you will need to plan to handle future shortages.
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 realize, optimize your pricing structure, and identify areas of waste or unnecessary expense to remove from your operations.
Accelerate your receivables
The quicker money begins flowing into your business, the sooner your cash flow problems will be solved. Here are some strategies to accelerate your receivables:
- Ask new customers for a deposit or partial payment up-front, rather than billing the entire amount in a single invoice after services have been rendered or products have been delivered.
- Encourage clients to pay in full within a limited time frame, such as a 2% discount. If money is tight, delay payments or stretch them.
- Send invoices early. Adjust the management of your receivables to invoice clients immediately following the delivery of products or services, rather than sending out all invoices on a particular day of the month. The sooner you send an invoice, the sooner you will receive payment.
- Focus on past due accounts. Scour your accounts receivable for past due clients and start making phone calls. You can ask past due clients for partial payments; every cent counts in a cash flow crisis.
- Make it convenient for clients to pay by offering additional payment methods, such as credit card or mobile and electronic payment options.
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 inquire about delaying payments. Vendors to whom you have been loyal will be flexible and willing to work with you during a tight situation. You may also be able to get some leeway or even a reduced obligation from your utility providers.
Slash expenses
As a rule of thumb in business, you should constantly scrutinize every single penny that leaves your bank account, but you will need to be especially critical of spending during a cash flow crisis. During a cash flow shortage, you must prioritize your company’s expenses. Eliminate unnecessary expenses and only spend on the costs that keep you operational and generate revenue.
The earlier you can nip a problem in the bud and resolve it, the easier and less costly it will be. That’s the reasoning behind so many best-practice tips: be proactive, effective, and efficient in your cash flow management.
As experts in accounting, Hayes & Associates can help your business improve its cash flow management. By implementing smart accounting systems optimized to help you and your business, you can fine-tune your business model, increase cash flow, and improve profitability to get your business out of the financial weeds and elevate it to the next level.
