How to Avoid and Resolve Cash Crunch in a Small Business
Business cash flow problems are different from running at a loss. You have money coming in, just not fast enough. The difference between net revenue and net expenses is your cash flow. You can calculate it monthly, weekly or even daily.
If there’s more coming in than leaving, it’s a positive cash flow. Vice-versa, it’s a negative cash flow and you’ll be facing a cash crunch, which can be devastating for a small business, and potentially even leave you looking to Liquidate Your Business at Auction and see if you can raise some money for any surplus equipment you have that you are not currently using.
How to Avoid a Crash Crunch
The first step in avoiding a cash crunch is realizing you need positive cash flow. Just a few delayed payments could upset your cash flow, so don’t confuse profitability with sustainability.
Study the core factors affecting your cash flow thoroughly, and track them to better predict your cash flow and take pre-emptive measures. You can also diversify and add ‘backup’ income avenues, or leverage the right technology. Many apps can help you manage cash flow better, including digital lending apps that provide a personal loan for businessmen.
Resolving a Cash Crunch
Understanding business dynamics and planning are absolutely essential, but just about every small business will face a cash crunch at some point.
Here are 8 things you can do to get yourself out of it:
- Extend Vendor Payments – If you’re in a cash crunch, there’s a good chance your vendors will wait a bit for their invoices to be cleared or at least delay part of the payment. Keeping track of cash flow also helps since you can tell them in advance and give them time to make other arrangements. If you share a good business relationship with your vendors, they’ll be willing to let you put their payments on hold for some time.
- Short-Term Financing – As a smaller establishment, it’s important to have quick access to a personal line of credit for business with flexible repayment options and reasonable lending rates. You can sign-up and apply for an app-based credit line through your phone and get an instant loan whenever needed.
- Long-Term Financing – Longer term loans are ideal for large purchases which would disrupt cash flow for a long time, or capitalizing on high-return investment opportunities. They can take a while to be sanctioned, but many digital lending apps provide instant loans with long-term EMI options as well.
- Speed Up Recovery – You can’t just sit around waiting for payments, the best thing you could do is call debtors and follow up on outstanding dues. Send out friendly reminders if required. Most businesses run on delayed-payment terms and you could ask customers to pay all or part of the invoice before the due date. You could even incentivize prepayment by offering a small discount.
- Liquidate Unused Assets – If you have assets that you’re not using or have become obsolete, selling them could help you raise at least some additional capital and free up space as well. You can also monetize existing high-value assets as collateral for a secured loan at a lower interest rate.
- Renegotiate Payment Terms – Renegotiating payment terms with existing and new clients can help relieve cash crunches, especially if they’re happening frequently. This is the main reason you should pay attention to your cash flow projections and set your terms accordingly.
- Find a Factoring Partner – Factoring partners will give you immediate cash based on your accounts receivable. They charge a small fee, and this is a great alternative to offering pre-payment discounts. As a bonus, they’ll follow-up on the payment for you too.
- Negotiate with Management – While it’s not ideal, as a last resort you can talk to your management team to wait a while for their paycheck (or at least part of it). This will usually take a lot of convincing but it’s better than your business failing due to cash flow problems!
- Put a Pause on Unnecessary Expenditure
When cash flow crunch strikes, it’s time to take a closer look at your expenses. Analyze your expenses and check if there’s something you can put it off for later or completely cut off. For example, if you see there has been a drop in sales, then the best option would be to reduce your monthly or weekly inventory order. The more you cut corners, the more better will be your cash flow.
Keeping a small business running takes grit, determination and most of all, keen foresight. Nevertheless, unexpected things happen, but there’s no harm in staying prepared. If you managed to come out of the cash flow crunch successfully the first time, your next step should be creating a plan to avoid another one in the future. A regular cash flow analysis could be a great starting point. Ensure that you always have a backup plan to help you tide over the tough times!
Shiv Nanda is a financial analyst . He is a true finance geek who enjoys helping people with money management, and his friends love that about him. They always turn to him for advice on their investment choices, budgeting skills, and personal financial matters.