According to a recent business survey, 90 percent of businesses fail due to a single reason i.e. cash Shortage. So, your company must have sufficient cash to operate the business smoothly.
No matter how hard a business owner tries, there are instances when the business can suffer a cash shortage crisis. The reason is that it is a challenge to pay for customer invoices, paying suppliers, and expenses at the right time.
Having a cash shortage crisis means you can’t keep up the cash flow with increasing expenses. So, either you can stabilize by paying attention or your company will fall behind. The only way to survive the business is knowing how to deal with the cash flow.
To make you ready for a cash flow shortage event, we have created this post, to rescue your business from a disastrous demise.
Causes of Cash Shortage Crisis
Before dealing with the cash crisis, it is important to know why you are facing this problem. There are some factors behind your company facing cash shortage:
- Low Profits.
- Bad sales, and distribution operations.
- High overhead cost.
- Unutilized huge production capacity.
- Producing inferior products at a large level.
- Low staff productivity.
- Less charging for products.
- Poor ordering as well as delivery processes.
- The business has uncontrolled spending.
- Buying Raw Materials at high rates.
- High operational cost.,
- Loss year after year.
- Insufficient sales to manage cash outflow.
- Less productive Capital Investment.
- Bad control over wastage.
- Not completing projects on time.
Techniques for Cash Flow Management and Solutions
Before you face serious loss, it is always better to act quickly and wisely to turn the situation around and prevent financial calamity. Let’s learn a few tips and tricks to help you come through a cash shortfall.
1. Update Your Financial Statements
Doesn’t matter if you use outsourced bookkeeping services or have the best accounting professionals, it is always recommended to update financial statements. Income and cash flow statements are equally important for monitoring how your money is operating through the organization.
This step is advised by us because when you monitor your statements carefully, you get more mornings about the pending issues. Small steps take you to a higher level. Never forget this.
2. Accelerating The Receivables
Remember the sooner money comes into your business the quicker you will solve cash flow problems. Let’s take an example of Tesla- It sped up its receivables by approving pre-orders for an item before it actually hit production. Let’s learn other techniques through which you can accelerate receivables:
- Try to ask fresh clients for a partial payment or deposit up-front. Avoid billing the full due amount in a single invoice after you render the service or deliver the products. For example, allow clients 30 payment terms. You can also offer payment discounts to the customers on paying immediately.
- Send your Invoices Early. Adjust receivables management to invoice customers the moment you follow the product’s delivery or services. Stop sending all invoices quicker on a single day because the earlier you send an invoice, you receive payment.
- Generate Invoices Frequently. Don’t wait for the completion of work in order to send an invoice, always try to generate invoices every two weeks. It will help you cover the products delivered up on time.
- Check Past Due Accounts. Clean the receivable due account and make phone calls. It is important to call your clients to remind them of their payment. Ask past-due customers for partial payments while suffering a cash crisis because each and every cent counts.
- Approve Other Payments: You should give your clients to make payments via additional methods like mobile apps, credit cards, or other electronic payments.
3. Think About Borrowing Options
A cash crisis takes place when extra money moves from your company rather than comes into the company. One method to come out of this situation is to bring more money into your business.
Here, you can communicate with your bank. You can ask for a credit card advance or business loan. Make sure to check the interest rates and all other points.
In case, you already own debt to your bank then start renegotiation of your existing funding. You can go for short-term finance to survive the cash flow crisis.
But, here we would like to clear one thing that when you take a debt, it just puts a band-aid on the issue. It could worsen the problem in the future.
4. Tighten Credit
It is important to stay cautious when you provide credit. Run a credit check on fresh clients and think about requesting references. Make sure to run a report and ask them to fill a credit application. Start approving credit cards and check references.
5. Negotiate with the Vendors
If you are stuck in a situation then try to explain the situation to the vendors. They might understand it and give you more time to make payments until your condition approves. If you just ignore the situation and won’t negotiate with vendors then it will damage trust and they might take some actions against you.
If you and vendors have long relationships then they may give you a small break to save their long-term interest.
For example, they can give you a discount on the current bills for a commitment of long-term purchasing.
6. Selling your Non-Essential Assets
To get instant cash, you can sell unwanted and non-essential assets. Check around if you have some duplicate inventories or overspent on unnecessary equipment. You can sell them off as these items may be valuable to someone else.
For example, You can unload company cars, and go for smaller travel-intensive sales methods.
If you do not own any non-essential assets but have assets that can be financed then try to raise money using these. You can lease these assets.
Also Find, Bookkeeping and Virtual Accounting Services: Pros And Cons
Two Best Habits That You Must Follow in Your Business
Make a plan. You require up-to-date and accurate financial statements (Balance sheets, income and cash flow statements).
Try to manage the financial statements timely to have a proper check on your company’s financial state.
“Prevention is always better than any kind of treatment.” Well, this saying also fits on financial strategy. You must take proper measures to stay away from cash flow shortages, like checking key performance, cash flow forecasting, management accounting, etc.
Always remember that ignoring a problem is the worst thing you can do.
We believe that the earlier you identify the problem and use your brain to consider solutions, the more are chances that you will 100% survive the cash shortage crisis. So, you have to be proactive, effective, and efficient.
We hope that you found this informative post on how to solve the cash flow problems. Also, if you have any queries about the elements in our post, then please write about them in the comments section. We will definitely find our best way to help you out.