Cash flow problems cause 69% of business owners to lose sleep and can threaten businesses globally. Positive cash flow is the lifeblood of any business. And the causes of cash flow problems can vary from natural disasters to recessions to social distancing recommendations. 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 manage cash flow and protect your business.
Whether you’re self-employed or a small business owner with employees, cash flow problems can be constant. Add economic disruptions to the mix, and it’s easy to see how even money-savvy businesses might experience cash flow problems. 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.
Making this information accessible can give you an accurate cash flow projection under normal circumstances. And in extraordinary situations, it can help you predict how scaling back will affect your business.
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.
- Expand virtual 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 when you’re experiencing cash flow problems, 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 cash flow problems
This year, a Seattle restaurant was offering a $135 fine-dining menu to a full room every night. Amid the coronavirus, they closed their dining room. To adapt, they’re delivering family-sized meals, supporting community gardens, and offering wine boxes and cocktail kits. Thanks to their swift response, they’ve kept cash flowing. And their business, although different, stands a fighting chance. If you’re experiencing cash flow problems, your business might slow down. But that doesn’t mean it’s come to a halt.
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