Bank accounts running low? Struggling to pay the bills? Worried about making payroll? You’re not alone. At the best of times, which these are not, businesses can hit cash flow speed bumps. In a challenging economy with rising costs and higher interest rates, running out of cash is, sadly, more common.
A cash flow crisis occurs when a business experiences a shortage of cash (insufficient cash inflows) to cover its cash outflows. In other words, the business doesn't have enough money to pay the bills, meet financial obligations, and keep itself running smoothly.
Cash flow crises can occur for a number of reasons, including unexpected expenses, declining sales, economic downturns, poor financial management, or excessive debt, to name a few. When it happens, you may be forced to take drastic measures such as laying off employees, selling assets, or worse, filing for bankruptcy.
It's important to manage cash flow effectively to avoid a crisis. From monitoring your income and expenses to preparing accurate cash flow projections to having a plan in place to address any potential cash flow issues, preparedness is job one. But, sometimes, a cash flow crisis is unavoidable, and you have to resort to a “Remain in Business” strategy.
Here are a few tactics to survive a cash flow crisis and to better prepare your organization for long-term sustainability:
1. Cut unnecessary expenses
If you’re like most businesses, odds are you’re paying for things you don’t really need or have forgotten you had. In a world of recurring fees where you “set it and forget it”, it’s easy to accumulate tools and technology that are nice to have, but not business-critical. Now’s the time to scrutinize every expense on your books and ask yourself, “Do we really need this?” Once identified, it’s easy to cut expenses to reduce your overall costs. Here’s a list of expense categories that often have room for reductions:
- Travel and entertainment
- Marketing expenses
- Subscriptions and memberships
- Professional fees
- Staff perks, bonuses and benefits
2. Increase cash inflows
While a bit cliché, when times are tough, cash is king. Look for ways to increase your cash inflows. But remember, when considering ways to increase cash, it's important to balance short-term solutions with long-term goals. Be strategic and consider the potential impact of each option on your business before making any big decisions. For example, price increases can raise revenue, but raising prices by too much can make the business uncompetitive, resulting in declining sales over the medium to long term. Here is a list of ways to increase your cash inflows:
- Raise prices
- Sell off inventory
- Improve payment collection processes
- Offer financing options to increase sales
- Offer discounts for early or prompt payments
- Run promotions
- Expand your product/service offerings
- Find partners that can increase your exposure and/or sales channels
- Sublet extra office space
- Sell assets (Ex: equipment, property)
3. Negotiate payment terms with creditors
Before negotiating payment terms, it's important to have a clear understanding of your current financial situation, including your cash flow, outstanding debts, and upcoming expenses. Once you have that information, you can take the steps outlined below to get better payment terms:
- Contact your creditors and explain your situation. Be honest and transparent about your financial difficulties and show your willingness to work together to find a solution.
- Propose new payment terms that are more manageable for your financial situation, such as extending payment deadlines or negotiating lower interest rates.
- Provide evidence to support your proposal, such as cash flow projections or financial statements.
- Work with your creditors to negotiate a payment plan that is feasible for your financial situation. This could include a temporary payment holiday or an installment plan.
- Once you have agreed on new payment terms, make sure to get the agreement in writing. This can help to avoid misunderstandings or disputes in the future.
Remember to be respectful and professional when negotiating payment terms with creditors. They are more likely to be willing to work with you if you are open and transparent about your financial situation and are willing to make an effort to find a mutually beneficial solution.
4. Prioritize bills
When prioritizing bills during a cash flow crisis, it's important to focus on paying the most critical bills first. Here are some steps to take when prioritizing bills:
- Identify the bills that are most critical to the operation of your business. These may include bills related to payroll, taxes, rent, utilities, or debt payments.
- Rank your bills by importance and prioritize those that are critical. Paying these bills first can help to avoid late fees, penalties, or service disruptions.
- Delay or negotiate payment terms for bills that are less critical to your business. For example, you may be able to negotiate a payment plan for non-essential bills like credit card bills or delay payment on non-essential bills like subscriptions or memberships. Remember, most businesses would rather offer you better terms than lose you as a customer.
- Monitor your cash flow regularly and adjust your bill payment priorities as necessary. This can help to ensure that you are paying bills on time and avoiding financial difficulties in the future.
Remember that prioritizing bills requires careful planning and budgeting. It's important to be realistic about your financial situation and make informed decisions about which bills to pay first.
5. Consider short-term financing
Short-term financing can be an effective way to manage a cash flow crisis by providing immediate access to capital. It can be structured in various ways, including lines of credit, factoring, and merchant cash advances, providing businesses with the flexibility to choose the option that best meets their needs. Here are some ways that short-term financing can help during a cash flow crisis:
- Cover immediate expenses like payroll, rent, and inventory costs, which can help to maintain business operations during a cash flow crisis.
- Bridge the gap between cash inflows and outflows, providing the necessary funds to pay bills and expenses until additional cash inflows are received.
- Provide immediate access to capital and help to avoid late fees, penalties, or service disruptions.
- Maintain a good credit score and improve creditworthiness, which can be important for securing future financing.
When considering short-term financing options, it's important to carefully review the terms and fees associated with each option. Be sure to compare multiple lenders and options before making a decision, and only borrow what you need to cover short-term expenses. Additionally, it's important to have a plan in place for repaying the loan or financing to avoid creating additional financial difficulties in the future.
6. Improve your financial management
While strong financial management should be a priority at all times, Improving financial management during a cash flow crisis can be critical to successfully managing the crisis and avoiding similar situations in the future. Here are some ways that you can improve financial management:
- Create a cash flow forecast to help identify potential cash flow shortfalls and plan for future expenses and revenue. This can help avoid unexpected cash flow problems and enable the business to make informed decisions about allocating resources.
- As mentioned above, you should review all expenses and identify areas where expenses can be cut or reduced.
- Improve invoice management processes to ensure that invoices are sent out promptly and that payment is received on time. This can help to improve cash flow and reduce the risk of payment delays.
- While it may seem counterintuitive to spend when you are trying to save, it may make sense to seek professional advice from financial advisors, accountants, or business consultants who can provide guidance and support. They can help identify areas for improvement and provide strategies for more effective financial management.
Final Thoughts
Improving financial management during a cash flow crisis requires a proactive approach and careful planning. By taking steps to manage expenses, improve cash flow, and seek professional advice, businesses can successfully navigate a cash flow crisis and emerge stronger and more financially stable in the future.
Surviving a cash flow crisis requires patience, perseverance, and a willingness to make difficult decisions. With a clear plan and a disciplined approach, it is possible to weather the storm and emerge stronger on the other side. We at Enkel have assisted all types of businesses with cash flow challenges. Contact us to find out how our team can assist you in preventing or navigating a cash flow crisis.
