Cash flow is essential in every business. If it’s positive, it means a company is earning more money than it’s spending, and if it stays positive, it’s a good sign of a business’s growth and can be a hint for an expansion.
Negative cash flow, on the other hand, isn’t always bad. It could mean that a business has a high startup, development, or expansion costs and is taking to generate cash inflows that surpass their investments.
However, when a negative cash flow becomes a shortfall in a company, it may end up in a business failure. The good news is that there are several strategies to help prevent this from happening. Check them out here.
Seek Financing Before You Need It
The best time to take out a loan to solve a cash flow shortfall is before it happens. Specifically, consider borrowing when the business is in the initial production stages or running smoothly. In this way, your numbers are still good, lowering the risk of rejection later.
If you’re a new business, borrowing money in advance helps you to fall back from any growing business pains associated with launching a startup. It does the same to those small businesses impacted by seasonality.
Consider borrowing twice the amount of what you need since its capital costs will be much cheaper. Imagine taking a big loan from a small business lender at 10% or less.
It’ll be more affordable than making several small purchases with your credit card, which carries an average 20 – 30% interest rate. Even worse, each purchase will have an interest.
If your business has already accumulated high-interest credit card debt, consider refinancing. For example, get a business line of credit with a 6% or 7% interest rate. Another way is to consolidate your loans.
It helps reduce the interest to as low as 6% and makes your loan repayment term longer. Debt consolidation is one of the best ways to recover from a cash flow shortfall quickly.
If you’re struggling to obtain a loan or don’t have any credit cards, try small business credit cards. They’re designed to support every short-term financing need of businesses of all sizes, so they tend to have interest-free grace periods.
They also come with saving opportunities and innovative reporting options, which can help business owners to optimize their cash flow.
Online lenders are now a good option to borrow funds for businesses. Take CreditNinja, for example. They offer various borrowing options for different financing needs of any company. They also offer quick installment personal loans that can also be used for any business purpose.
Many businesses are now taking online loans since they’re very convenient. Compared to regular business loans from traditional loans, most borrowers don’t have to undergo a rigorous screening process and need a stellar credit rating to take them out. What’s more, they usually disburse funds quickly, as fast as within the day of the loan application.
Encourage Early Payments
Learn from Tesla’s cash-flow-crisis-playbook. They offered and accepted pre-orders before they hit production, accelerating their receivables. In this way, any cash flow issue can be quickly resolved since money keeps flowing into the business.
However, the reality is not all businesses are as popular as Tesla. Despite that, there are other ways to get your receivables much earlier.
For example, instead of billing an entire amount due in a single invoice, encourage your new customers to pay upfront partially.
If they do so, offer them some small gifts. It’s a good way to improve a client relationship and cash flow.
Another is by offering a discount if clients pay in full. Do it within a limited time, so they’ll feel like they have to do it urgently.
While it can be a small sacrifice on your business’s end, the full payment usually outweighs the discount. It’s one of the effective options to survive a cash flow shortfall.
Other ways to accelerate receivables include:
- Send invoices much earlier;
- Send invoices more frequently;
- Focus on your past-due account; and
- Offer additional methods of payment, such as e-payment options.
Adjust Business Plan to Improve Profit Margins
A cash flow shortfall calls for an inspection of your business plan, including your processes, operations, and spending. With this, you can determine where the cash flow shortage takes place.
It’ll also help you identify whether it’s a recurring issue and whether you need to develop a strategy to handle future shortages.
Use job costing when checking your profit margins and profit and loss statements. It should be based on each category (i.e., marketing strategy, human resources, products and services, clients, events, etc.) to identify the most and least profitable.
Then, adjust your business plan by optimizing the pricing structure. More importantly, focus on areas that generate more profits. Don’t hesitate to let go of waste, unnecessary and costly parts, including clients, especially if they’re the least profitable.
Final Thoughts
In a nutshell, your small business can survive a negative cash flow if you’ll:
- Take out a loan before you need it;
- Speed up your receivables by requesting early payments; and
Make your business plan more profitable.
While cash flow management is one of the biggest challenges every business faces, it’s the key to long-term financial and business success. Accurately projecting cash flow will always steer a company in the right direction.
That’s all for today.
Do you have any tips in regard to managing cash flow?
Let me know in the comments.
