One of the worst fears that most business owners have is a cash flow crisis. Cash-flow management issues can leave companies in a difficult situation, where they have to struggle for ways to avoid liquidity problems.

Knowing different strategies to survive a cash flow crisis is something that you cannot afford to overlook, no matter your business model. In order to take timely action and save your company from damage or insolvency, you should consider the cash-flow strategies mentioned here. Let’s begin.

What is a Cash Flow Crisis?

Before we cover how you can survive a cash flow crisis, we need to have a better understanding of what it is. In the simplest of words, a cash flow crisis occurs when you spend more money than your business receives. It causes a cash flow shortage and can make it difficult for you to pay salaries, maintain cash reserves, keep your lines of credit, meet current payment terms,  budget for operating expenses, and much more. 

Therefore, you have to stay alert and manage the situation with extreme caution and sound financial wisdom so that your business doesn’t suffer the same fate as so many other failed organizations. 

The Best Strategies for Managing a Cash Flow Shortage

There are certainly more strategies than we will get into today. But this list should give you a good place to start and put you in the right mindset of better financial management and a sound cash flow plan. 

1. Improve Receivables

Speeding up your receivables will allow you to deal with the cash flow crisis in the best way possible. The faster money flows into your company, the faster you can make payments and avoid cash problems altogether. You should be able to speed up receivables by providing pre-orders on products that are not yet in production. Other excellent tips that will improve your receivables are mentioned below.

Ask for a Deposit from New Customers: It is always a good idea to ask your new customers to make a partial payment up-front so that you can have some cash available for operating and production costs. It also makes for an effective collections strategy, as people have an easier time paying in intervals and are more likely to stay with the agreement if they already have some skin in the game. 

Send Invoices Early: The next tip that you must incorporate is sending invoices to your customers early. It is best that you send an invoice to each client immediately following a purchase instead of waiting to send it later on in the month. The earlier you send the invoice, the sooner the payment will be made.

Send Invoices Frequently: You shouldn’t wait for the entire job to be completed before sending an invoice. Instead, you can cover the services that have been delivered so far by generating invoices every few weeks.

Focus on Past Due Clients: Make sure to go through your accounts receivable to find past due clients and give them a call. You might want to offer a partial payment plan to ease the cash flow crisis. After all, you could use the money.

Make It Easier for Customers to Pay: If there is one tip that always works for easing cash flow problems, it is providing additional methods of payment like mobile or credit card payment options and other savvy, easy-to-use payment apps. 

2. Negotiate the Payables

Another strategy that will help you survive a cash flow crisis is better negotiation of your payables. By delaying or reducing how much cash flows out of your business, you should be able to reduce the strain on your working capital. It might be best that you practice honesty with vendors and let them know that you are dealing with a cash flow shortage and could benefit from better terms or at least delaying payments for some time. If you’ve built a loyal relationship with your vendors, they will often be happy to work with you to find equitable solutions. 

Even though not every vendor will be willing or able to do so, there are bound to be some that will allow you to make it through your tight situation using more favorable or creative terms. 

3. Adjust Your Business Plan for Improving Profit Margins

When it comes to a cash flow crisis, a great strategy that you should consider is inspecting your business plan and strategy. You need to uncover the root cause of the cash flow shortage. There is the possibility that it is related to a recurring problem. This means it is time to look more closely at your process through detailed analysis, examining each area of your plan completely.

Start by evaluating your profit-and-loss statements using job costing. It will allow you to determine the profit margins of each category, such as jobs, employees, clients, marketing strategies, events, products, or services, and more. Then, you will know which areas of the company are the least profitable so that you can make necessary adjustments to your business plan.

Once you’ve evaluated your plan and come to some conclusions, you might have to make difficult decisions like letting go of certain clients that cost more money than anticipated, optimizing your pricing structure, and cutting down on expenses that appear redundant, excessive, or simply not paying off.

4. Borrow Money

In addition to the above, you should consider borrowing money to resolve a cash flow shortage. To bring more money into your company, you can either take a credit card advance or a business loan. You must evaluate the interest rates and the terms of each loan before you agree to take on new debt.

It is vital that you consider your options to ensure that you don’t end up making any mistakes. You don’t just want to get rid of the problem temporarily. You should always borrow money with a long-term perspective in mind, with a clear understanding of how this new loan will both benefit and negatively affect different areas of your business. If your company is suffering from an intrinsic problem, taking on debt might not be the right option. But always do so with great consideration.

5. Raise Capital

Successful companies also opt for investor capital to increase their working capital. However, think about this decision, as you don’t just want to sell an ownership stake to anyone simply to resolve a cash flow shortage. You must determine which type of investor will suit your business, and choose only those who display the traits, knowledge base, and experience needed to bring the most benefit with the least amount of hassle. Raising capital is a solid option to remedy a cash flow problem, and can be a quick cash injection, but you should do so only after thorough research. 

6. Cut Down Expenses

Every single expense should be scrutinized to ensure that it is genuine and necessary. You don’t want to waste money when it is already a limited resource. You must be critical of how you spend each penny, and be able to link your spending to specific desired outcomes. It is the only way you can stay on top of things. Go through every expense to find out which expenses are unnecessary so you can eliminate those that aren’t benefiting your business and focus on those that are. You should only spend on expenses that help in generating revenue and expanding your reach.

7. Sell Unused Assets

Lastly, you should go through all the assets your company owns and find out which ones are unused or underused, and sell them to improve your cash flow. Sometimes, cutting unessential expenses is just not enough. This is why you have to sell unnecessary items to raise much-needed cash. We often have more things around that aren’t serving our needs or have ceased being the useful tools we once enjoyed. Free up the cash and the space. 

In Closing

Since approximately 82% of companies struggle with cash flow issues, it is crucial that you learn how to deal with these difficult seasons in proven and creative ways alike. When you implement an effective plan which incorporates useful tips, sound financial wisdom, and thorough research, you should be able to avoid difficult situations and future cash flow problems or at least have a better grasp for how to get yourself out of them. And don’t forget to connect with a great bookkeeper to help you make the most of your finances and business plan. 

Sound Accounts helps business owners organize and manage their finances successfully, so they can stop worrying about the books and focus on the core of their business. Find out the difference Sound Accounts can make in your business today. Also, see if you qualify for 6 months of free QuickBooks while you’re at it. 

To learn more about dealing with a cash flow crisis, see our frequently asked questions below. 

FAQ

What are some strategies for reducing cash flow problems?

If you want to reduce cash flow problems, there are two strategies that you need to follow. These are preparation and prevention. It is vital that you create a plan after analyzing your most recent financial statements, including cash flow statements, income statements, and balance sheets. 

By going through your financial statements regularly, you will gain greater control of your financial usage and goals. Improving your financial position comes down to taking active prevention steps like tightening business operations, monitoring KPIs, and cash flow forecasting.

What can I do to improve my company’s cash flow?

There are a number of things that you can do to improve the cash flow of your business, which are mentioned below.

Improve Receivables: The first thing you need to do is encourage customers to pay for products or services sooner than later. You will have to send invoices early on to get them to do so, and conduct regular but friendly follow-ups. 

Negotiate Payables: Have a chat with your creditors to negotiate payables and negotiate more favorable terms.

Eliminate Unnecessary Expenses: Keep an eye on all your expenses and eliminate ones that don’t contribute to your business.

What parts does a statement of cash flow consist of?

There are three parts to a statement of cash flow, which include cash flow from all the operating activities, cash flow from financing activities, and cash flow from investing activities. With just a bit of practice, you should be able to create a statement of cash flow for your business and improve your situation.

It is good practice to monitor all your cash inflows and cash outflows, perform a cash analysis regularly, and be ready to constantly refine your business strategies, cash flow techniques, and daily decisions to become a better money manager and business leader.