A cash crunch can break any small business, irrespective of its domain of operation. As a small business owner, it’s simply impossible to project your cash flows accurately with 100% accuracy, all the time . There are lots of factors that could trigger a cash crunch. From pending invoices, improper pricing, unexpected expenses, and poor implementation of marketing strategy to downward sales during off-season and lack of strategic investments – all can result into a cash crunch. However, if any or all of these sound familiar to you, you’re not alone. But no need to fret and fume as fortunately, there are certain basic and repeatable strategies that can greatly help you to overcome cash crunch and even prevent it to some extent. Here’s a quick rundown of five such tips.
1. Stay laser focused on payment terms
Continuous cash flow greatly depends on maintaining a fine balance between accounts receivable and accounts payable. Failing to do it leads to a cash crunch. If you don’t set a clear payment term with respect to time frame and/or certain amount of work delivered, clients won’t pay you in a timely manner. To avoid a cash crunch, consider asking your clients to pay their invoices on time. You may even offer discounts to encourage timely payment by your clients. Asking for an upfront payment and/or getting paid at key phases of delivery are other ways to improve your cash flow. Also, have a clear plan of action for non-paying or late-paying clients. Similarly, if you have vendors with unrealistic lending terms, try to renegotiate with them. If you make sizeable purchases and are a repeat customer, your suppliers and vendors should be willing to modify the terms to have your business.
2. Develop a cash flow forecast
A cash flow forecast is the estimate of the fund you expect to flow in and out of the business. This is a sort of an early warning system that helps you forecast substantial cash crunch in advance. It helps you understand whether your business can afford to pay its employees, vendors, bills etc. Will it be perfect? Probably not. But that doesn’t mean it can’t vie you valuable insights. A simple way to forecast revenue is going through your revenue history together with your industry trends to estimate incoming monthly fund and calculating outgoing fund for each month. Whenever you forecast a month with low cash flow, ensure you know where to look for financial help. Your cash flow projections should also help you to make proactive business plans for avoiding a cash crunch. From whether you should consider offering new services or products to your customers, to if branching out sales to different countries and varied markets would be financially prudent, your cash flow projections can help you plan ahead to overcome a cash crunch, and in some cases, even prevent it. In brief, it can be said that the more you pay attention to mapping out your expected cash inflow and outflow, the more likely you’re to avoid a cash crunch.
3. Implement operational flexibility
Every business experiences ups and downs in its revenue. Many small business owners fail to consider these cycles ahead of time, which leads to low-cash situations. A flexible business plan can substantially help to avoid the lows. Consider saving profits from the high-sales time and negotiating with the vendors and suppliers when your sales are low. For instance, if you maintain consistency in paying your vendors, ask them for reduced rates and variable payment terms during lean business periods. This mayn’t be the best option to avoid a cash crunch, but you’ll at least have flexible and fast access to your working capital. But for any business with extreme cyclicality or seasonality, it needs to be planned for.
4. Maintain limit with your commitments from the beginning
Consider assessing every line of your business expenditure to identify where it can be reduced. Try to trim costs to increase your profit margin wherever possible. Also, go through both your variable and fixed costs to decide whether they’re absolutely necessary for working optimally. Try to figure answers of these out – Are there any subscription you’re not using? Is the marketing budget delivering sufficient ROI? Can you have a better deal on the utility costs? Savings from all these would help you create a financial cushion that you can use during your low-sales period or other emergencies to avoid a cash crunch.
5. Ensure fast access to capital
A cash crunch can take a huge toll on your small business if you don’t have fast access to capital when you need it. There are certain essential things to run any business. From paying rent and utility bills to taxes and payrolls, your expenses are many. Failing to handle any of these can directly create a huge turmoil in your operations. So, make sure you’ve fast access to adequate funds to fulfill these expenses and other obligations, as it would ensure your business’s smooth functioning until you sail through the situation. The most common access to capital? A business loan. After all, the time to approach a bank about financing BEFORE you need it, not after.
The key to ward off a cash crunch depends on the timely implementation of these aforesaid strategies. In addition, you may even take steps like deferring some of your outgoing payments, or asking your bank for some temporary credit etc to tide over your cash flow crunch. But above all, it’s crucial to identify your potential problem areas and have plans to resolve them while staying prepared for the lull. After all, when you have planned ahead and know you can overcome it, even the temporary disruption that a cash crunch causes won’t put a lot of stress on you and your business, and you’ll be able to tide over it without being severely affected.