For many small businesses and startups, cash flow is critical. Having the available money to pay for wages, materials, rent and utilities is vital in keeping your business going day after day and month after month.
Indeed – in this article from business insurer Hiscox, insufficient cash flow is listed as the number one reason businesses fail.
So what should you do if you find yourself in a cash flow crisis, when you have bills that need paying but not enough available cash to pay them? In this article, we will cover some options and strategies that you can use to get your business through this tough time and come out the other side fighting.
1. Negotiate with your suppliers.
Be honest with your suppliers and let them know that you are having a temporary cash flow issue. Try and negotiate to delay your due payments or break the payments up into chunks, spread out over the course of a few months.
Many suppliers will be happy to help you out, as they risk not being paid at all if you go under, and they’d certainly rather get something than nothing.
2. Speed up the time it takes to get paid.
In a cash flow crisis, it is critical that you get money rolling in to your account as soon as possible. Cutting the time it takes to get paid by your customers, even partially, will make a big difference.
- Ask for a deposit or partial payment up front, particularly for new customers.
- Offer additional payment options such as bank transfer, credit card or PayPal to make it easier and quicker for your customers to send you money.
- Change your invoicing behavior by sending invoices more frequently (for instance, at various milestones during the completion of the work – rather than all in one chunk at the end) and/or invoicing as early as possible.
- Chase up your debtors. If anyone owes you money and they are yet to pay, get on the phone and chase them on the payment. Many customers won’t make you a priority unless you force the issue.
3. Minimise your expenditure.
You should look to cut any unnecessary costs as soon as you can. Obviously expenses such as mortgage/rent and utilities are essential costs that you can’t do a whole lot about. But things such as staff perks and entertainment are not critical during a cash flow crisis and can be temporarily suspended.
You could also look to renegotiate any deals you have with service providers to try and shave off a few pounds. These can add up.
Also, cutting costs may unfortunately extend to losing staff members. And while this is an extremely difficult and challenging thing to have to do, it may be that some staff members have to make way in order that the rest of the company can continue to exist.
4. Borrow money.
In the same way that consumers may turn to a short term loan provider such as Growing Power to get through when cash availability is low, businesses may also look to borrow money to get through a cash flow crisis.
A word of caution however – borrowing money at this stage needs to be very carefully considered, as of course, that money needs to be repaid. So although in the short term your cash flow issues are solved, you may just be moving the problem a few months down the road.
5. Sell equity.
One way to raise capital is to sell some of the equity in your business. The positives of this are that you should be able to increase your capital relatively quickly and you may get the knowledge and experience of a new business partner to boot.
However you should very carefully consider if you really want to take this step and lose some of your business that you worked hard to grow. Also, although time may be a critical factor here, you should still take the time to do your due diligence on any new investor and ensure that the decision is carefully thought out and not rushed.
6. Sell some assets.
You may have cash tied up in assets that are not critical to the running of your business – in which case you could consider selling these to raise working capital in the short term, without substantially affecting your ability to run your business and trade as normal.
Hopefully these tips have given you some ideas about how you can fight through a cash flow crisis.
If you can get to the other side with the business intact then you will no doubt be a better business-person for the experience, and it may even help you make positive changes for the future, to ensure you don’t run into the same issues again.