82% of businesses fail because of cash flow issues, according to Business Insider. When a company is experiencing a cash flow shortage, more money is leaving the company than is coming in. That implies that you could not have enough money to pay your employees’ salaries or other operating costs if there is a cash flow problem.
A cash flow crisis happens when business leaders don’t have a strategy or plan in place to deal with a cash flow shortage. You must be prepared to act in the event of a cash flow crisis if you want to prevent the early demise of your company.
Modify your business plan to increase profit margins
You should carefully review your business plan, procedures, operations, and expenses if you experience a cash flow shortage. You need to figure out what caused the cash flow shortage, whether it will happen again, and whether you need to put a plan in place to deal with it in the future.
The most and least profitable parts of your organisation can be identified by using job costing to analyse your company’s profit and loss statements and profit margins based on certain categories (jobs, clients, employees, events, marketing tactics, products, and services). This will enable you to revise your pricing strategy, let go of clients who may be costing you more money than you realise, focus on services that make the most profit, and identify areas of waste or unnecessary expense to cut from your operations. It will also enable you to optimise your pricing structure.
Quicken the Payment Process
In order to avoid a cash flow catastrophe, follow Tesla’s lead and accelerate your receivables. Your company’s cash flow issues will be resolved as soon as money starts coming in faster. Tesla accelerated their receivables by allowing and accepting pre-orders for a product prior to its release, but there are other methods you can employ:
- Instead than invoicing the total amount owing in a single invoice after services have been provided or products have been delivered, ask prospective customers for a deposit or partial payment up front.
- Send out your invoices in advance. Instead of sending out every invoice on the same day of the month, change the way you manage your receivables to invoice customers as soon as the goods or services are delivered. You will get paid faster the earlier you send an invoice.
- Send out invoices more often. Create invoices weekly or biweekly to cover the services provided up to that point rather than waiting until a work is completely finished before sending one.
- Concentrate on your unpaid accounts. Look through your accounts receivable for customers who are past due, then start calling them. In a time of tight cash flow, you can request partial payments from past-due clients.
- Make it simple for customers to pay by providing extra payment options, like credit cards, mobile payment options, and electronic payment options.
Negotiate Your Payables
Working capital will be less strained if you can postpone or lower the amount of cash leaving your business during a cash flow problem. When negotiating payments or asking about postponing payments, be sincere with your vendors. The likelihood is that vendors you have been loyal to will be adaptable and willing to work with you in a challenging position, despite the possibility that others may be unwilling to budge. Your utility providers may also be able to give you some wiggle room or possibly reduce your payment.
Think about your lending options
When your business is losing money faster than it is making it, you are experiencing a cash flow shortage. Finding a way to bring money into the company is one option to address the issue. A company loan or a cash advance on a credit card can be used for this. To avoid making a decision that will merely push the issue down the road to be addressed at a later time, be sure you are aware of the interest rates and have investigated all alternative options before taking on business debt.
If your company is experiencing a cash flow crisis due to an underlying issue, taking on debt will only serve as a temporary fix and make the issue worse in the long run.
Obtain Investor Funding
Selling equity is an additional quick approach to boost your company’s working cash and attract a new business partner. However, before selling a portion of your company’s ownership to address a cash flow issue, make sure you really want to or need to. This is similar to taking on debt. Additionally, be cautious about the types of investors you select to partner with and sell to. Do not allow the stress of a cash flow issue to influence your decision-making for the future of your company.
As a general rule, you should examine every single pound that leaves your business bank account, but amid a cash flow problem, you should be more vigilant. You need to give your company’s spending top priority when cash flow is tight. Spend just on the costs necessary to keep your business operating and generating money. Cut out all needless costs.
Dispose of non-essential property
In a cash flow problem, you can sell non-essential company assets in addition to reducing non-essential spending. This is a quick and efficient approach to get some money when you need it, even if it is only a temporary solution because you can only sell an unwanted item once.
Two Best Practices for Better Cash Flow in Your Business That You Should Always Adhere to:
You will need a strategy in the event of a cash flow problem, as well as accurate and current financial statements (income statements, balance sheets and cash flow statements).
To keep tabs on the financial health of your business, maintain your financial statements on a regular basis.
The saying goes, “An ounce of prevention is worth a pound of cure.” This adage applies to both financial and medical planning.
Prevent cash flow shortages by tightening up your company’s operations, projecting your cash flow, keeping an eye on important performance indicators, and adopting management accounting such as Sage’s awarding winning Intacct.
Utilise management accounting to increase cash flow and prevent shortages.
The main goal of management accounting is to forecast cash flow, enhance cash flow, and entirely prevent cash shortages utilising your company’s financial data. You can completely avoid cash flow constraints by keeping an eye on and improving key performance metrics like your company’s days sales outstanding and profit margins.
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