How does a business stay afloat when facing the most gruelling challenges?
The answer lies in having a good cash management system.
Be it a micro-business or a multinational company, cash is vital when it comes to maintaining a healthy business.
One of the main reasons why a lot of new businesses don’t survive the first year is because they’re not able to cover the day-to-day costs.
So, what is a cash flow crisis?
Usually, a cash flow crisis occurs when there’s more cash flowing out of the business than in, making it hard to run the day-to-day operations.
The most important point to remember is that cash flow is not the same as profit.
Your profit margin can be high and your company may show strong growth projections but if all of your money is tied to non-current assets or stocks, there may still be a shortage of liquid cash required to run the business.
This will lead you to default on outstanding payments and damage your reputation with suppliers. And, we all know how crucial reputation is for any kind of business – the next time you need to apply for credit from your suppliers, there’s a high chance it will be denied.
Therefore, it’s vital to know how to manage your cash flow for the long-term success of your business.
So, how can you prevent and manage a cash flow crisis?
There are a few precautionary steps you can take to keep your cash flow in check and avoid problems.
1. Create cash flow forecasts and update financial statements
Before you prepare to tackle cash flow problems, you need to work out your business’ financial information for both present and future.
You can set targets for a quarter, a half-year or a year to keep track of your finances.
Watch out for any deviation from the set target and take the appropriate measures as soon as possible.
The simplest way to do this is to keep a spreadsheet that details the monthly income and costs.
Allow for seasonal variations and factor in the fixed and variable costs.
Another way to keep track of the cash flow of your business is through Chipax, an Enterprise Resource Planning (ERP) system that keeps track of your income and expenses.
You won’t have to waste time rummaging through invoices and files to manually input data every time.
To understand how money is moving through your business, it’s necessary to keep an eye on this updated statement of cash flow and the income statement.
This will give you a heads up about any impending issues so that you can manage the crisis in time.
2. Slash unnecessary expenses
It’s common sense to curb unnecessary expenses if you want to keep your cash flow thriving.
Prioritize operational expenses and eliminate any costs that aren’t generating revenue.
But, there’s no need for overly dramatic cost-cutting.
There are many smart ways to make significant savings just by changing a few things around the office.
You can save on electricity and utility bills if you take a closer look at your company’s energy consumption.
Air-conditioning, heat, lights, computers, and printers are some of the appliances that can save you a ton of money on bills.
Make it company policy to turn off any appliances that aren’t in use.
Travel expenses can also be cut down by having video conferences.
Rather than cutting down on the payroll or employees, create strict policies against overtime, reduce working hours if employees are paid hourly, or offer unpaid sabbaticals if the need arises.
Even after all these tweaks, if you still need to raise some quick cash to meet your overheads, you can sell off non-critical assets or apply for a bank overdraft or a short term loan offered through financial service providers.
It’s important to maintain a good relationship and have an excellent credit rating with your lenders if you want them to treat you favourably in times of emergency.
3. Time your receivables and payables
Timing your payments is one of the main ways you can avoid and manage cash flow crisis. Set out clear-cut rules for receivables and payables.
This will help you plan the working capital cycle accurately with these payment dates in mind.
If you’re worried that your company may face a difficult quarterly, urge your receivables to pay early.
The quicker the cash comes in, the sooner you can control any crisis.
Some ways you can speed up receivables is by asking customers or clients for a partial payment or a deposit.
You can also send invoices early or as soon as a delivery is made instead of waiting for the end of the month.
You can also break up your invoices into part payments and send them weekly or bi-monthly.
Your clients or customers will appreciate these additional payment methods. For example, the option of credit card, mobile or electronic payments.
To reduce the strain on your working capital, you also need to manage the money flowing out of the organization.
Negotiate with your suppliers or vendors when you’re having a cash flow crisis and delay or reduce payments until you have the money to pay them.
Be open and honest.
A good relationship with your suppliers is important for your business’s reputation.
Don’t let overdue bills pile up without having a discussion with your suppliers.
And, if you’re working with long-term suppliers, there’s a good chance they’ll allow some leeway.
4. Efficient stock management
Managing stock can be as important as managing cash. Holding too much means a lot of your cash is tied up.
Therefore, reconciling your stock on a weekly or monthly basis is essential.
A stock reconciliation also keeps you updated on what items are left in stock and what needs to be ordered.
This way, the reconciliation prevents you from spending too much of your cash on the excess stock.
Last details to keep in mind
Even if you run a tight ship and keep track of all the cash coming in and out, you’ll likely still hit a snag here and there with cash flow.
That’s why it’s important to have a contingency plan.
Be proactive in tackling problems and try to solve them as soon as possible.
Be aware of the market conditions and the financial situation of your customer base and suppliers.
If all else fails, seek expert advice, such as accountants or business mentors.