As your business grows, so does its costs. Managing your turnover in relation to your expenses and profit is essential to sustaining a robust business. A key part of this process is cash flow management – having the funds available to pay for expenses, such as wages, leases, or inventory, and support growth. While cash flow management sounds straight-forward, it often isn’t – particularly if the business encounters an unexpected setback. Here are some strategies to consider if you find yourself in this situation:
1. Reduce business expenses
The most obvious way to fix a cash flow problem is to reduce expenses. In this case, analysing business expenses is necessary to know where and how you can reduce costs. Any cash outflow that’s not essential should be removed.
During a shortage of funds, spending should focus only on what keeps the business operational and supports the generation of revenue. This increases liquidity whilst the cash flow is limited. Some of the common ways to cut costs are reducing overheads, leasing equipment rather than buying outright and delaying any increases in salaries or hiring new employees.
2. Send invoices early
A lot of businesses experience an ‘invoice lag’ – meaning it takes a long time to get paid by customers. This can be overcome by sending invoices early or immediately after the delivery of products or services, creating a sense of urgency. You may also consider asking new customers for a deposit or partial payment upfront.
3. Negotiate terms with suppliers
There’s nothing wrong with discussing your situation with suppliers so you can come up with a mutually acceptable solution. A good negotiation should leave each party satisfied. For example, you might ask for delayed payment in exchange for larger or more regular orders. Or you might pay for raw materials closer to the date of when you’re scheduled to receive payment for your services. Many suppliers and vendors also accept partial payment but still deliver all the goods or services needed by clients. In addition, it’s often free-of-change to initiate better payment terms with suppliers.
4. Encourage clients to pay faster
Giving clients a reason or a way to pay faster can quickly improve cash flow challenges. In particular, a convenient payment process encourages clients to pay early and avoid late payments. To help expedite payments, you might consider setting up auto-billing and accepting mobile payments. If the business has an existing website, a payment feature could also be added to it.
5. Consider a short-term business loan
Short-term business loans are a quick way of getting much-needed funds to help ‘smooth’ cash flow crunches. However, before you take out any loan, you must fully understand its terms and obligations and ensure it aligns with the immediate and upcoming business needs.
In Australia, many specialist and private lenders offer alternative sources of finance like a caveat loan and other business loans. These lenders look at more than just your business credit score. Their application process is usually quick and easy, and funding is usually available within a few days from the application being approved. Mango Credit is an established short-term lender in Australia. Check out the Mango Credit Reviews, which shows how they have helped many people with their bridging and business loans.
6. Improve your inventory management
Keep in mind that inventory is also an asset. Business inventory comprises items that are ready to be sold, held for sale, and used in the production process. Therefore, how these items are being managed also affects the company’s working capital. For example, if a business’s inventory is too large, it decreases its value due to unnecessary expenses like warehousing costs. Alternatively, when there’s a shortage of funds, items that are not selling well can be sold at discounted prices. As a result, you may have reduced profits, but you receive additional cash flow (as if the stock is just sitting in your warehouse, they are not generating revenue).
7. Use personal funds
Many business owners revert to using their personal funds to soften the blow when the business is short of cash. While it makes sense on paper, it’s prudent to be careful about this strategy as it’s rarely sustainable.
Keep in mind that getting out of a financial crisis requires effort, which should be staged and not ‘knee-jerk.’ It’s advisable to involve your accountant as soon as you become aware of a potential problem (and not bury your head in the sand with the vague hope that it will be somehow ‘magically’ resolved.