Updated 17 Dec 2020
Cash flow problems happen when a business does not have enough liquid cash to cover its liabilities. When cash outflows exceed cash inflows, businesses may struggle to pay debts and other expenses.
Net cash outflows don’t necessarily indicate that a business has a cash flow problem. It’s common for businesses to experience a net cash outflow when making large payments or experiencing seasonal business fluctuations. Cash flow only becomes a problem when outflows exceed inflows. At that point, the business uses up its cash reserve and can no longer meet its liabilities.
Cash flow issues can arise from low-profit margins, problems invoicing and collecting payments, and over-investing in inventory or capacity.
Cash flow problems can threaten your business’s health, whether you’re self-employed or a small business owner with employees. 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, 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 reducing expenses isn’t easy, your survival plan will bring essential and non-essential expenses into the spotlight. Depending on your circumstances, a few creative changes may help get you back to positive cash
– Discontinue non-essential services temporarily.
– Expand virtual services.
– Cancel or reduce premium services.
– Move to a lower-cost supplier temporarily.
– Implement control system for operating expenses, you may use Route for this.
– 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 profound. And there’s a lot you can do to get paid faster.
Send invoices earlier.
Review your billing cycle and payment terms.
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 may 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 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
Borrowing money 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 short-term loans can seem like a tempting lifeline when you’re experiencing cash flow problems, there are 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 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.