Even thriving, profitable businesses can have cash flow problems if payables (amounts due to vendors or suppliers) are due before receivables arrive (money due to a firm for goods or services delivered or used). In fact, 29% of businesses fail because they run out of cash. During a cash flow shortage, a business may not have enough money to cover payroll or other operating expenses. It’s imperative that businesses have a strategy or plan in place to overcome a cash flow crisis.
Strategies for avoiding and/or overcoming a cash flow crisis:
There are a number of strategies and approaches that can help companies correct and or avoid cash flow difficulties.
- Lease: When leasing (supplies, equipment, real estate) you pay in small increments helping to improve cash flow. Also, lease payments are a business expense and can be written off on your taxes.
- Offer discounts for early payment: Create an incentive for customers to pay their bills ahead of time by offering an early payment discount. This is a win for you and your customers.
- Obtain short-term loans for working capital: Short-term loans are borrowings undertaken for a short period to meet immediate monetary requirements. They support a temporary business capital problem. Though they have a higher interest rate, they’re easy to get approved and are less expensive than most long-term options.
- Use a business line of credit: A line of credit is an arrangement between a bank and a customer that establishes a preset borrowing limit that can be drawn on repeatedly. Borrowers pay interest on the outstanding balance and not on the entire credit line. Interest rates are often more favourable.
- Try business credit cards: Credit cards provide smaller limits than short-term loans and lines of credit but are easy to obtain and sometimes offer reward options on purchases. Use them for small purchases and operational needs.
- Conduct customer credit checks: Before signing up a new customer, conduct a credit check. If the client’s credit is poor, assume you won’t be receiving payment on time. If you decide to opt for the sale, set a high-interest rate on overdue payments.
- Form a buying coop: Many suppliers give discounts to firms who buy in bulk. Find like-minded companies willing to pool cash in order to lower prices with suppliers.
- Improve inventory: Goods you buy that aren’t moving at the same pace as your other products hurt your cash flow. Reduce them or get rid of them.
- Invoice immediately: Automate your invoicing system to reduce the number of errors and improve the speed of invoicing. Provide easy-to-read invoices with clearly stated terms.
- Use electronic payments: This allows you to pay a bill on the actual due date, increasing the time before cash flows out of your business.
- Negotiate better terms: Maintain friendly, regular communication with suppliers so you can negotiate better terms. Offer early payment for a discount or negotiate extended payment options.
- Increase pricing: Experiment with pricing to find the perfect number; the limit of what customers are willing to pay for your products and/or services.
- Ask new customers for a deposit or partial payment up-front, rather than billing the entire amount due in a single invoice after services have been rendered or products have been delivered.
- Focus on past due accounts: Identify past due clients and make phone calls. Ask for partial payments.
- Make payment convenient by offering additional methods (credit card, electronic, mobile).
- Raise investor capital: Bring in new business partners by selling equity.
- Reduce expenses: Prioritize company expenses. Eliminate unnecessary expenses and only spend on the costs that keep you operational and generate revenue. Shop around to see if there are cheaper options available for phones, internet, and third-party information technology.
- Sell non-essential assets: Although this is a temporary fix, it’s a quick and effective way to raise some cash when you’re in a bind.
- Pre-sell products or services: Encourage sales sooner by pre-selling. It’s a way for consumers to plan ahead.
- Finance purchase orders: If you’re a manufacturing or merchandising company and you require a significant amount of cash to fulfill your orders, financing purchase orders may be helpful. The financing company pays the vendor so you can acquire the merchandise/inventory you need to fulfill the order. This allows you to take large orders that you don’t yet have the cash to fill.
- Turn down, shift or postpone work to manage the volume of business for consistency over time. Offer good clients a discount for postponing their work, order or service. This will not be a viable strategy for companies with strong seasonal business (retailers, accountants, etc.).
- Invoice factoring involves selling your invoices (an asset) to a factoring company. Instead of waiting 15, 30 or 60 days for your money, your business gets payment upfront.
- Hire an accountant: A chartered professional accountant will have the knowledge and experience to offer you creative solutions to your cash flow problems.
Working capital is the fuel that powers small businesses. Managing cash flow is critical to running a profitable long-term business. Constantly look for new ways to improve cash flow management in your company.
Looking for ways to examine and improve your cash flow? Contact Cook and Company Chartered Professional Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company use their experience and expertise to help your business. Contact us for a complimentary consultation.
