A cash flow crisis is a common problem for businesses of any size. It occurs when inflows are smaller than outflows. The funds shortage may occur for many reasons, including political events, global economic crisis, risky investments, and poor accounting. In such cases, many business owners look for additional income sources. For example, they can start investing and trading cryptocurrencies (Ripple price prediction). It’s a good option if you have knowledge. If not, consider the most traditional ways to deal with the cash flow crisis.
1. Start with a Plan
Cash shortage can be caused by numerous factors that don’t depend on you and your management approach. However, before you shift responsibility to someone or something, you better check your business plan, expenses, and processes.
You should apply job costing and evaluate what business categories lead to profits and losses. Using this approach, you will find out what services contribute to the income, reconsider pricing, assess how much money is spent on workless activities as well as inspect what clients aren’t so lucrative and maybe you will let them go.
2. Cut Expenses
It’s not the easiest activity. But you need to save more money to stay afloat. Sometimes, it requires firing the employees or lowering their salaries. It’s the last thing you should do when cutting expenses.
Look for cheaper alternatives. Do a proper market analysis and find more affordable contractors and vendors. If your business doesn’t require employees to visit the office daily, you can offer remote work that will save money for electricity, cleaning, water, snacks, etc. If you plan to launch a new product or new business, you should freeze the preparation if only you are not 100% sure it will increase your income, so you exit the crisis.
3. Attract Investors
If your business is promising but suffering temporary difficulties, you can assure investors you have the potential to grow. You can offer partial ownership. You can hold an IPO and sell the company’s shares if you are big enough. This will reduce your influence on decision-making, but you will solve cash flow problems. Don’t make decisions fast. Think about what part of the business you can sell and what degree of influence of another owner you can accept.
4. Negotiate on Payments
Negotiate with your vendors on a delay or shortage of payments. Try to explain the problems and find benefits for them, so they want to help you. Build trustworthy relations with the vendors before the crisis. This will contribute to their flexibility and willingness to support you when you struggle. Even utility providers could agree on delays if you paid on time before. Still, you should remember that you will have to pay the debt out when the crisis ends. Thus, don’t try to agree on delays on all payments. Pay little by little. Otherwise, enormous debts will hit your business again when you recover, leading to another cash flow crisis.
5. Increase Receivables
It’s unlikely the price increase will lead to higher incomes. You may just lose customers, which will affect your future success. However, you can raise the receivables to make money flow into the business quicker. There are several strategies to speed up receivables.
- Pre-orders. Tesla is a good example. The company offered and accepted pre-orders for products that hadn’t been produced. This method can be applied if only you are developing a new product and are planning to launch it soon. Otherwise, you risk facing lawsuits for fooling your customers.
- Pre-payments. Another option is to take deposits or partial payments before rendering a service. This option won’t scare consumers as many companies use this method.
- Fast invoices. If you have agreed with customers on post-payments, you can shorten the period between the delivery and invoice. This is, you shouldn’t wait for a specific day when you will send all invoices at a go. It’s best you invoice the customer as soon as they get the product. Another point of this strategy is the frequency of invoices. Don’t wait for the work to be completed. Send invoices as soon as a service is delivered. For instance, if it’s manufacturing, you can split the production, delivery, and installation into several steps and invoice the client as soon as each is finished.
- Past due payments. If you have clients with overdue payments, you should contact them immediately and ask to pay the total amount or at least a part of it.
- New payment methods. To increase customer loyalty, you can increase the number of possible payment methods, including cash, credit cards, mobile payments, and bank transfers.
It doesn’t seem challenging to avoid the cash flow crisis. However, many companies suffer from cash shortages. Such crises mainly affect small businesses due to the lack of experience and knowledge.