Cash flow management refers to managing the cash and liquidity of a company. Within this area, in-flows are more significant than cash outflows. Efficient management, in this case, ensures that the firm has some liquid assets available at all times to deal with unanticipated expenses or avail trade discounts or opportunities.
Approximately 82% of businesses fail because of cash flow and mismanagement problems. New companies often struggle in this regard as effective cash management is a learned skill. It is essential to have a proactive approach to cash flow management to avoid situations of cash shortage or the ultimate demise of your business. Being proactive also saves time and prevents the stress of going through a financial crisis.
In this article, We will learn the top six ways to prepare for and deal with cash flow problems within your business.
1. Increase Profit Margins
A cash flow shortage is a good indicator that you need to inspect your business plan, day-to-day operations, and overheads closely. Your firm needs to figure out why it encountered the shortage and if it is an ongoing problem. The company then needs to implement a plan to handle any deficiencies that might occur in the future.
Job costing can be used to understand the financial statements of the business. Profit margins can be checked for different activities of the company, such as jobs, clients, marketing, employees, products, services, and events, and determining which areas of the business are making more profit than others.
Looking at individual spend categories will also enable you to plan better by making required changes to your business plan. You have to let go of costly clients, analyze all unnecessary expenses, and optimize your pricing structure. Cutting down overheads or increasing the price of your product or services can let you improve profit margins, which can help avoid cash flow crises in the future.
2. Speed Up Your Receivables
Another way to overcome cash flow problems temporarily is by asking existing customers to pay upfront and reduce the credit timeline. You can start sending invoices and automated reminders following their purchase and delivery of your products. This will keep your customers up-to-date with payments that are due, and you have a higher chance of receiving payments sooner if you send out receipts on time.
You can set up a system within your business to regularly send invoices and generate receipts every week or two weeks. This will ensure that all due accounts have been informed about their payments. Your finance department can also call or email your customers to remind them of their due payments. This will ensure regular cash inflows and prevent any cash flow problems in a proactive approach.
You can also make it convenient for your clients to pay their credit amount by offering them payment through more accessible payment gateways like credit cards, PayPal, and digital banking. This will reduce the time taken to issue and process cheques or send cash payments that come with logistical issues.
3. Negotiate Your Payables
If the business can decrease the cash outflow of the company during a cash shortage, it will automatically decrease the overall burden on the working capital. Be fair with the vendors to enquire about delayed payments or negotiate payments. The vendors that have been doing business with you will be happy to help in challenging times and stretch the payment timeline. The reduced obligation will also reduce the stress.
4. Consider Other Borrowing Options
You can improve your cash flow by borrowing money from external financing options. This can include bank overdrafts, payday loans, selling stocks, and acquiring credit cards. You will need a strong gearing ratio of your business to be qualified for loans.
It is essential to understand interest rates and choose loan options with minimal interest rates to avoid unnecessary expenses in the future. It would help if you also planned out a repayment plan of loans to prevent further unanticipated costs and cash flow problems. The cash you acquire from the loan will enable you to pay your expenses and overcome financial crises in the short run. Loans, like payday loans, can be obtained quickly, providing an easy fix to your cash problems.
5. Reduce Expenses
It is a common rule for effective business operations to reduce expenses as much as possible. The lower your overheads, the higher your profits are going to be. You should eliminate all the expenses that are unnecessary to streamline your outflows and keep the cost minimal.
Some important questions to ask yourself will include looking around and eliminating unnecessary materials like tissue papers or branded bags for your packaging. This will also include cutting down on unnecessary workers and downsizing a little.
6. Sell Additional Assets
If you have unused or extra office supplies or machinery, this might be your ideal time to sell those to earn extra cash to ensure your payroll is issued on time. It will help you get rid of unused stuff and increase your cash availability at the moment. This is a temporary fix, but it can help you with cash when needed. You can also try selling additional digital assets, including cryptocurrencies or NFTs. They are highly liquid and can help you gain some cash in a short amount of time.
Financial crises and cash shortages are challenging times for every business. With the constant pressure of issuing payroll on time and paying back the creditors, it can get overwhelming to deal with a cash shortage. It is crucial to prepare ahead of time to avoid crises regarding cash management.
Delaying your credit payments, cutting down on additional expenditure, selling unused and different assets, asking your receivables for early fees, and seeking external financings like overdrafts and loans can help you overcome cash-flow problems. You can consider borrowing from family members and friends.
However, it is crucial to be prompt with repayments of loans from external sources or family and friends to conflicts. Along with this measure, effective cash flow management can improve your financial management and prevent shortages in the future.