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How to Survive a Cash Flow Crisis

What would you do if your company ran out of money?

It’s a very real concept that many small businesses face, especially in the wake of the recession.

You may be a small seasonal business needing to make it through the off-season, clients may be slow to pay or expenses could be racking up. Whatever the reason for the situation, planning is key.

Here are some steps that any entrepreneur should consider ahead of a cash flow crisis:

Plan, plan, plan!

Being prepared with a plan of action will mean you will have a better chance of survival and will be able to act strategically when the clock is ticking.

Create a cash flow projection and develop a plan based on this. This will give you a clear view of when the money is coming in, going out and help you to anticipate any pitfalls in the months ahead. In your plan you should devise useful strategies for increasing cash flow and paying off debt.

If you want to secure a loan, you’ll also need to share a document like this with your lender and provide them with a financial forecast, proving your ability to make loan repayments– another good reason to create this plan.

Look at accounts receivable

Before you start cutting costs, chase up the money that is owed and find ways to speed up the payment cycle. Here are some options to consider:

  • Send invoices out quicker
  • Offer customers more payment options such as credit card so you get paid faster
  • If you or your team are on the road a lot, consider a mobile invoicing solution.
  • Look into reducing your payment terms to 30 days or less
  • Offer incentives to customers who pay quicker
  • Charge fees to late payers (this should always be agreed with clients in advance of carrying out the work)
  • Request a down payment upfront or agree a payment plan with your client

On the accounts payable side of things, try renegotiating contracts with vendors and lenders. Seek extensions on the timeframe of your payments – do this before payments become an issue.

Cut costs

A cash flow crisis usually involves cutting costs. Make sure you do this carefully.

Start with the unnecessaries. Do an audit across all your outgoings and list what is essential, what is good to have and what can be scrapped now.

If pay cuts are necessary, begin at the top of the ladder. This will show good leadership and loyalty to your employees. If you do have staff, their pay should be the last item on the chopping block.

If layoffs are really necessary, consider reducing full-time employees to temporary, part-time or freelance positions first. However, do bear in mind part-time and freelance employees will probably need to look for work elsewhere to make up for lost income, so do not take this step unless it is absolutely necessary.

There are a ton of savings that could be made whilst also being greener. Consider e-conferences to reduce travel costs, better regulation of your thermostat or switching to more digital business solutions, ditching the paper and printing costs.

Get more money

It may be necessary in times of crisis to reduce product costs and offer huge discounts in order to attract more customers. This is a short-term solution and you should make it clear to customers that the prices will not remain this low. Liquidating the inventory will temporarily increase the cash flow, but it is important to have a strategy for replenishing the inventory.

Another quick fix to improve cash flow is last resort borrowing. Cash advances on credit cards are an option, and so is taking cash distribution from an IRA. Both of these actions can have serious consequences if there is no way to pay them back in a timely manner. Cash advances usually incur higher interest rates, and the IRA is only tax-free for 60 days.

If times are desperate consider taking loans from family and friends or bringing in new investors. The situation may not be ideal, but most companies have to sacrifice to survive a cash flow crisis.

Key takeaways…

  • If you develop a strategy for dealing with a crisis before it happens you will have a much greater chance of success if it does arise.
  • Monitoring your cash flow regularly to help you to stay one step ahead of any potential issues.
  • Before you cut costs, try to increase collections. Send invoices out quickly and find ways to encourage customers to pay faster.
  • When cutting costs, make sure you do this carefully and start with the unessential costs. Cutting employee pay should be the last thing you do.
  • Seek extensions on the timeframe of your payments to vendors and lenders.
  • Liquidating your inventory may work as a short-term measure, but have a strategy for replenishing it.
  • If you need to borrow more money consider the consequences and plan carefully how you will make timely repayments.

Photo credit: © DenisKot istockphoto.com

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