With some experts predicting a recession, stocks falling worldwide, and the economy “on standby,” small business owners are grappling with uncertainty. Not many can say they’re cash flow positive and have more money coming in than they have going out.
Cash flow problems, which cause 69% of business owners to lose sleep, are threatening businesses globally. COVID-19-related cash flow issues are hitting business owners.
Positive cash flow is the lifeblood of any business. And the causes of negative cash flow can vary from natural disasters to recessions to social distancing. But one thing is certain: Planning for and confronting cash flow problems can empower you to cushion—or even avoid—financial blows to your business. You can still solve cash flow problems in a crisis and protect your business.
How to solve cash flow problems
Whether you’re self-employed or a small business with employees, cash flow problems can be constant. Add a disrupted economy to the mix, and it’s easy to see how even money-savvy businesses might buckle under the weight. Fortunately, you can use these five tactics to help tackle common cash flow problems.
1. Create a short-term business survival plan
Break down your business plan, processes, upcoming operations, income, and expenses in your plan. If applicable, use job costing to review your business’s profit and loss statements and margins. Identify the lion’s share of expenses and profits in products, services, clients, and labor. The goal is to stay open by scaling back and slowing down.
Having this information handy can give you an accurate cash flow projection under normal circumstances. In extraordinary situations, having this information handy can help you predict how scaling back will affect your business.
For example, a hair salon owner might adopt procedures like sanitizing hourly, offering virtual consultations, and delivering color kits to keep their doors open and cash flowing.
2. Reduce expenses
While this isn’t easy, your survival plan will bring essential and non-essential expenses into the spotlight. Depending on your circumstances, a few creative changes might help get you back to positive cash flow.
- Discontinue non-essential services temporarily.
- Offer virtual or delivery services.
- Cancel or reduce premium services.
- Move to a lower-cost supplier temporarily.
- Reduce operating costs.
If you find yourself trying to make the hard choice to lay off workers, consider these alternatives first. And if you think you have to shut your doors temporarily, ask yourself these four essential questions. Just don’t forget that you have options.
3. Speed up accounts receivable
It sounds simple, but the effects of faster payments are quite profound. And there’s a lot you can do to get paid faster.
- Send your invoices earlier.
- Break up payments into project-based weekly or bi-weekly installments.
- Request payments from past-due accounts.
- Ask for a deposit or partial payment upfront.
- Encourage or incentivize early payments.
- Accept multiple payment methods.
It’s also a good time to collect any unsettled debts. If you’re finding you have a lot of outstanding debts, you can sell your debt through invoice factoring. In this case, the factoring company will pay you a percentage of what you’re owed. You’ll have cash in hand, while the company settles your client’s debt.
4. Negotiate accounts payable
Reducing or negotiating expenses is another way to encourage positive cash flow. With more working capital, you can prioritize expenses and prevent cash flow problems from spiraling out of control.
Start with utility providers and vendors who have a history with you. Be honest and willing to talk about flexible terms and payment options. If your cash flow is strained severely, be strategic and selective about the payments you make. The legal consequences of not making payroll, for example, far outweigh those of not paying your cable bill.
5. Consider your borrowing options
Injecting money into your business by borrowing is another way to balance your cash flow. Ideally, you opened lines of business credit when your financials were more positive. But if that isn’t the case, ask your current financial service provider what they can offer before turning to other lenders.
Although borrowing money can seem like a tempting lifeline during a cash flow crisis, there are some caveats. First, you’ll need to have a documented business plan and cash flow forecast to show lenders. Second, interest rates and other terms and conditions can have long-lasting consequences. So read the fine print before borrowing. Finally, if there’s an internal flaw in your business, a fresh injection of cash won’t solve cash flow problems. It will only delay them.
Bouncing back from a cash flow crisis
Earlier this March, a Seattle restaurant was offering a $135 fine-dining menu to a full room every night. Reacting to the coronavirus, they shut the dining room doors. To adapt, they opened a bagel shop, a drive-through, and a family food delivery service. Thanks to their swift response, they’ve kept cash flowing. And their business, although different, stands a fighting chance.
If you’re in a cash flow crisis, know that things can get better. Your business might slow down, but that doesn’t mean it’s come to a halt. Use the tactics listed to help solve cash flow problems and stay afloat, even in turbulent times.
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