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 running smoothly.
Cash flow crises can occur for several reasons, including unexpected expenses, declining sales, economic downturns, poor financial management, or excessive debt. When they occur, 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. Preparedness is job one, from monitoring your income and expenses to preparing accurate cash flow projections to having a plan to address any potential cash flow issues. But, sometimes, a cash flow crisis is unavoidable, and you must 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 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, cutting expenses to reduce overall costs is easy. 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 clearly understand 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 feasible payment plan 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 willing to try to find a mutually beneficial solution.
4. Prioritize bills
When prioritizing bills during a cash flow crisis, paying the most critical bills first is important. 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. You must 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 effectively 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.
- Maintaining a good credit score and improving creditworthiness 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 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 always be a priority, 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 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.
Strategies for Avoiding a Cash Flow Crisis
Brace for Impact: Cash Flow Management Tips With Rising Costs
As rising rates drive up total expenses, it's more critical than ever for businesses to focus on effective money management. You need complete, accurate data to make the best decisions — which detailed, organized financial records provide.
Here's why cash flow management matters as costs continue rising in Canada.
Why cash flow management matters
Cash flow is the lifeblood of any business.
Let's start with the basics — the difference between cash flow and profit:
- Cash flow is the total amount of money going in and out of a business. If you have a positive cash flow, more money flows in than out of your business within a set period.
- Profit is money gained from an activity after paying business-related costs.
These terms are often used interchangeably, but they're unique. When managing cash flow, you'll need to understand cash flow statements.
Strategies for managing increasing expenses
The recent tax hike is just one of many rising expenses. Data shows that 65% of Canadian companies are feeling the pinch, and rightfully so. According to the BDC, the cost of doing business has accelerated by 600%. While that's an overwhelming thought, there are strategies you can take to stay afloat, including the following.
- Conducting a thorough expense audit as part of a larger proactive cost management strategy. You must regularly monitor financial performance, paying close attention to money going out. You can then pinpoint what expenses are necessary and which you can eliminate moving forward. Check out this resource if your credit card expenses are out of control.
- Optimizing operational efficiency means reducing your costs by leveraging resources more effectively. Leveraging technology and automation are great starting points. Learn more about optimal technology and infrastructure practices during uncertain times.
- Negotiating with suppliers and creditors can be a good strategy for achieving cash flow optimization. Managing these relationships can help you improve your financial position, reduce debt, and enhance cash flow. When submitting a proposal, be realistic, honest, and flexible.
Revenue enhancement techniques
If your goal is to start improving your bottom line to balance rising expenses, maximize the revenue streams you already have.
Here are some strategies:
- Adapting pricing strategies by researching competition-based, cost-plus, dynamic pricing, and value-based models.
- Identifying new revenue streams either by creating new products and services or expanding. Diversifying current offerings by developing packages or upsell options is a great way to earn extra revenue.
- Improving customer retention and acquisition strategies is an ongoing strategy that requires building brand trust, remaining communicative, and implementing a more personalized customer experience.
Develop plans to mitigate risks and lean on technology as you work toward increased revenue. For example, predictive analysis tools can help you do both, contributing to better cash flow management before a situation becomes dire. Next step: Check out Strategies for Surviving a Cash Flow Crisis if you're in a bind, and plan accordingly using these ten tips.
Invest in proactive cash flow management
Effective cash flow management practices are essential for any business, regardless of how the economy evolves.
If you don't already, regularly analyze, monitor, and optimize your organization's money inflow and outflow.
Starting today, leverage digital cash flow management software like Quickbooks Online. This level of automation can streamline certain tasks so you can focus on the analysis component of your cash flow management strategy. You should also complete a cash flow projection for the upcoming year.
Simple Ways to Improve Cash Flow
A paperless cash flow ecosystem increases efficiency and cost-effectiveness by reducing the time and resources spent on manual data entry and physical storage of paperwork. Bookkeeping software automates many bookkeeping tasks, such as categorizing transactions and generating reports, which reduces errors and frees up time. Reducing paper usage and storage needs also lowers ongoing material and office space costs, contributing to a more sustainable business practice.
Going paperless through electronic invoices
Using cloud-based online accounting software, like QuickBooks Online or Xero, allows businesses to create and send online invoices directly to clients via email. The online invoice will also contain a “Pay now” link to make it easy for clients to settle the invoice. The easier you make it for clients to pay you, the faster you will likely receive payment.
Both Xero and QuickBooks Online enable automated invoicing for recurring invoices, as well as gentle follow-up reminders for outstanding invoices.
Going paperless through online payments
You can also go paperless by accepting credit cards or online payments instead of cheques.
A cheque can take several business days to clear because it has to move between the various parties (from your customer to you, from you to your bank, and then from your bank back to your customer’s bank to request payment). Cheques are also more expensive due to the handling fee associated with them.
On the other hand, domestic online payments will take one business day to clear (sometimes instant, depending on the payment method) and have a lower processing fee.
Automate your billing process
Many small businesses know they should improve their cash flow. But with so many aspects in the cash flow ecosystem that can impact the cash flow cycle, it can be difficult to know what to tackle first.
To start with, there are two simple optimizations with your receivables you can address today that are sure to have an almost immediate positive impact on your cash flow:
- Sending out your invoices on time
- Making it easy for your clients to pay you
Send out your invoices on time
It sounds simple enough, but with time being a rare commodity in any small business, billing often gets delayed. The sooner you send out invoices, the sooner the payment terms will kick in, the quicker you will receive payment, the healthier your cash flow will be.
Make it easy for your clients to pay you
If your clients have to move from one platform to the next, manually entering details into their bank, double-checking that the amount is correct, and manually logging it into their accounting software, your invoice is likely to be set aside until they have at least half an hour of free time to complete the whole process.
As previously mentioned, your online accounting software can be used to send electronic invoices with links that take your clients directly to the payment options. If customers can pay an invoice within five minutes of opening their email, chances are your invoice will be settled much quicker.
Both of these aspects can be addressed through automated billing. Manual processes are prone to human error, which can take time to fix, delaying payment even further.
An example of an automated billing platform is Plooto.
Plooto can be integrated with your accounting software to automatically import unpaid invoices and bills. It makes it easy for clients to pay through email, credit card, or pre-authorized debits. It can also be programmed to send automatic, gentle payment reminders.
Improving cash flow is not just about accounts receivable. You should also monitor your accounts payable and look for suppliers offering discounts on early payments.
Software such as Beanworks can automate payments on the accounts payable side, allowing you to take full advantage of maximum vendor payment terms while still making sure you pay suppliers on time to avoid late payment fees or interest.
Create a cash flow forecast
Software like Dryrun allows cash flow data from QuickBooks Online or Xero to be imported and then adjusted so businesses can test different scenarios based on when cash is expected to come in and when bills are due.
Cash flow forecasting allows businesses to take a proactive, rather than reactive, stance toward their current cash position. This will give you time to respond to potential future cash shortfalls.
Instead of just paying vendor invoices when they come in (which is rarely a good strategy) and running the risk of depleting cash reserves, business owners can strategize and plan when to pay certain bills without ruining the relationship with a supplier.
It also gives you time to plan how expected future cash surpluses can be put to good use to grow the business overall.
There is arguably a better feeling for any small business owner than seeing a positive cash flow at the end of the month, and nothing reduces stress levels more than knowing your cash flow is under control and being managed effectively. With these cloud technology tools in your arsenal, you can focus on improving other areas of your business without having to worry about your cash flow.
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 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. Whether your company is located in Vancouver, Edmonton, Calgary, or Toronto, we've got your bookkeeping needs covered! Contact us today to learn more.
