No business is exempt from the potential of a cash crunch. A low-cash situation can arise due to slow receivables, poor cash flow management, or any number of unforeseen circumstances. Your business could be impacted by either the issuing or receiving end of a payment process, and cash flow issues can challenge the health and sustainability of your operations. We’ve written before about cash management and cash flow forecasts, but here we’ll focus specifically on avoiding – and, if needed, pulling your business out of – a cash crunch.
Set Clear Terms
To maintain ample cash in the bank is a basic tenet for virtually all businesses. Still, cash shortfalls can happen more often than not, with a common cause being slow receivables. To decrease your chances of having to deal with late-paying or non-paying customers, it is crucial from the beginning of a client relationship that you establish a clear time frame in which you expect to get paid. Make this explicit in the engagement contract. Put practices in place that will flag overdue payments and follow up with late payers. It might help to offer discounts or other incentives to collect payment more quickly.
It’s possible slow receivables have caused your business to be a late-payer to another party. A defensive measure is to negotiate new terms or a temporary setup with your vendors and suppliers. Those vendors with whom you have the best relationships would be a good place to start. If you’ve built up a track record of punctual payment, they may be willing to provide extra time or agree to a specific deal for the short term. Negotiating a discount from a vendor might help offset any discounts you might be extending to your own customers.
Maintain a Safety Net
It would be ideal if you were never in a position to need quick cash, but you might need to borrow on a short-term basis to just hold yourself over until the next check comes in. One way to prepare for this emergency is to keep a line of credit with your bank. Consider applying for it even if you don’t currently foresee any cash problems. You don’t have to draw funds if you don’t need them, but this credit line will be good to have in case of an emergency. You’ll be paying interest only on the portion of the line of credit that you actually borrow.
Other ways of tapping into short-term financing, when your businesses may find themselves in a dry spell, include putting your receivables to work. This isn’t necessarily a cheap way to borrow, but if there are urgent payments to make – rent, payroll, etc. – then this might be a viable option for you.
Keep in mind that borrowing short-term can affect your future cash flow and long-term cash management. This means due diligence to find the most appropriate and applicable financing and a projection of future cash-flow must be part of your decision-making process.
Take Advantage of Technology
There are tools that can help improve cash flow management. Online accounting systems can provide greater visibility into how cash flows within a business. Implementing a vendor portal online could help cut the cash conversion cycle meaningfully by enabling real-time access to invoices and electronic payments. At the very least, billing customers electronically, rather than by mail, could reduce the time it takes for you to get paid.
Avoiding a cash crunch isn’t a one-time task. A business needs to have an ongoing plan to manage its cash flow with plans squarely in place for heading off any missteps along the way. Active – and regular – monitoring and projecting of cash flow are critical practices for sound fiscal management. This can help pinpoint potential areas of concern, as well as times of highs and lows in revenue if there are any seasonal factors affecting your business. Anticipating such cyclicality can help a business find room for flexibility and avoid getting caught in cash-strapped situations.