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Running a business

How to Handle a Cash Flow Shortage

Knowing how to handle a cash flow shortage can be crucial to the financial survival and success of your small business. Cash flow crunches are fairly commonplace for small business owners investing in expanding their business. It’s easy for you to become overextended when adding locations, inventory, or employees. Seasonal or temporary marketplace downturns can also create a cash flow shortage. Here are several tips for handling cash flow problems, along with suggestions to help you avoid these problems in the first place.

Convert Unnecessary Assets to Cash

One way to quickly produce some extra cash is to sell off assets such as unneeded equipment. Any factory or office machines that you no longer use can be quickly sold and converted to cash. If there’s a company vehicle your business can do without, it’s another asset that can likely be sold quickly for a substantial sum of cash.

Even if you don’t have any dispensable assets, you may still be able to raise some cash by selling equipment that you own and replacing it with leased equipment.

Contact Lenders to Renegotiate Financing

It’s a good idea to get in touch with your lenders as soon as you detect a possible cash flow shortage. Lenders are typically much more willing to negotiate with you before you’ve gotten to the point of missing debt payments.

You can aim to renegotiate current debt, or if you’re confident that your cash flow crunch is only a very temporary situation, consider taking out a small, short-term loan sufficient to solve your cash flow problems.

Negotiate With Suppliers

Cutting expenses can certainly help to improve your cash flow position. One way to temporarily reduce your business expenses is to negotiate with suppliers for extended payment terms on any outstanding invoices you owe.

As long as your business is current on utility payments, it’s usually possible to arrange to skip a payment or two until your financial situation improves. Again, it’s best to contact such suppliers at the first sign of potential cash flow problems.

Step Up Invoice Collections

Another way to obtain an infusion of cash flow is to accelerate any funds you have coming in from customers or clients. Consider sending out invoices more quickly and shortening your payment terms. For example, if you currently send out invoices at the end of every week with terms of net 30 days, you could change that procedure to sending out invoices immediately with terms of net 15 days, net 10 days or even “due upon receipt.”

If you have clients or customers with whom you’ve established a solid relationship, solving at least part of your cash flow shortage may be as easy as explaining your situation to them and asking for prompt payment.

Cut Business Expenses

Nearly any business can improve its cash flow position by reducing its expenses. While you may want to avoid more drastic cost-cutting measures such as laying off employees, it’s important to be willing to take such measures if necessary. Other simpler cost-cutting measures include cutting back on travel expenses, office supplies or slow-moving inventory.

Avoiding Cash Flow Problems: Keep an Eye on Your Cash Flow Position

You can avoid potential cash flow shortages by keeping a watchful eye on your cash flow position at all times and especially when you know that cash is getting tight. Generate and review your cash flow statement monthly or even weekly. If you see a pattern of declining cash flow, then take immediate steps to improve things.

Plan Ahead Financially

Careful budgeting is one of the simplest steps that you can take to avoid financial problems for your small business. Plan out your business expenses well in advance, looking at least six months and preferably 12 months or more ahead. Make sure that your planned business expenses match up realistically with your projected income.

You may have begun a business expansion but then realized it was likely to lead to cash flow problems. In such an instance, it’s usually better to avoid potential problems by putting your expansion plans on hold until your overall revenues or cash flow position improve.

Manage Inventory Better

For many businesses, inventory is a major overhead expense. It also means it’s usually an expense that can easily be reduced or better managed. Examine your inventory carefully using financial metrics such as the inventory turnover ratio, which reveals how quickly on average you sell through your existing inventory. Consider each product or product line that your business sells with an eye toward cutting back on slow-moving products while increasing your stock of best-selling items. Also check your ordering procedures to ensure you aren’t unnecessarily ordering inventory too far in advance.

Maintain Good Relationships With Lenders

You may think you’ve acquired all the financing that your business will ever need, but it’s a good idea to build and maintain relationships with lenders even when you don’t need a loan. One way to put yourself in a good position to handle cash flow shortages is to obtain a line of credit from your lender that you can readily access whenever you need a little extra cash. Obtaining a line of credit in advance is easier than having to go looking for a loan when your business is experiencing financial difficulties.

Use the tips provided to avoid cash flow shortages or to deal with them if they happen. Managing your cash flow is one of the most important factors in making your small business a success.

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