When it comes to growing your business, nothing is more important than cash flow. In fact, according to the US Bank, 82% of small businesses fail due to cash flow problems. It happens to the best of us and oftentimes occurs in the midst of rapid growth. The good news, however, is that you can avoid cash flow problems altogether by planning strategically, but if you find yourself in a rut, here are some tips to manage the crisis.
Inarguably, the best way to avoid a cash flow crisis is to prepare a comprehensive, realistic operating plan and tax plan respectively. If you are reading this and have not sat down to create a plan, it’s never too late. You can get yourself back on solid financial footing and ensure that this does not happen again. Below are some strategies that have helped clients dig out of cash flow problems in the past:
Speed up your receivables
Sometimes, all you have to do to squeeze yourself out of a cash crunch is speed up the timing of payments you were already going to receive. Whether you’re asking new customers for an upfront deposit, chasing down owed payments from existing clients, or sending your invoices a bit early… Getting cash in hand sooner rather than later is critical in these situations.
The most obvious tip on the list. If you find yourself pressed for cash, it’s time to go through every single expense individually and decide whether it can be paused, or removed entirely from your business equation. This could be as simple as an expensive software that you haven’t used in years or as complex as consolidating by cutting an additional location. The bottom line is, you should cut any unnecessary expenses and focus solely on operational expenses that allow you to continue generating revenue.
In addition to cutting expenses, you can also sell any and all non-essential assets if the circumstances require it.
Dig into your emergency fund
Have you been putting money away for a rainy day? If so, it’s time to deploy that capital in the most strategic manner possible. Whether that’s paying back a strict debtor, or making this month’s rent, you’ll be glad you thought ahead. If you don’t have a rainy day fund, and are going through cash flow struggles, this is a reminder to put some money away when the sun is shining and incorporate a budget into your daily-to-day operations.
It is often recommended that you store 3-12 months (the longer the better) of expenses away in an emergency fund for situations like these.
Reassess your pricing model
Whether you’re selling services or products, it never hurts to reassess your pricing, with respect to current market and financial conditions. Increasing pricing may sound like a risky proposition, but you may be underselling yourself in comparison to the market. You may be undervaluing your product or service without even realizing it. Depending on your business, a small change in price can genuinely make a huge difference when it comes to your bottom line.
Borrowing (Last Resort)
After exhausting all other options, you can always resort to borrowing money in the form of a credit line or business loan in order to continue operating your business. This is the last resort because ideally, you do not want to borrow money in most situations. Before taking on any form of debt, ensure that you speak with your accountant or financial advisor. Understanding interest rates, loan terms, and forming a repayment plan is critical to avoid going from one problem to another.
All in all, there are a multitude of ways to get yourself out of a cash crunch and it really comes down to your individual circumstances. Sit down, relax and assess your options in an organized fashion. The best way to do this is to structure a tax plan with your accountant or financial advisor. We’ve been successfully helping clients of all sizes structure financial plans and tax strategies for years.
Contact us for a free consultation, we’re happy to help and answer any questions you may have.