Managing Cash Flow Crisis: 8 Essential Steps

Referring to cash flow, Michael Dell has been quoted as saying, “We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”

Managing A Cash Flow Crisis-

Managing a cash flow crisis is a skill that will make you a great asset to your enterprise. The textbook definition of cash flow shortage is when a company’s cash outflow exceeds its cash inflow, in such cases; you might not have enough money to cover payroll or other operating expenses. Managing a company in this situation can be a nightmare. Unfortunately, the likelihood of cash flow shortage occurrence is much higher than you’d hope it to be but fortunately, we have prepared an eight-step plan to bring your business out of the financial crisis. 

1. Where did you go wrong?

First and foremost, don’t be discouraged. It’s very natural and common for businesses to face setbacks. Maintaining a positive attitude, reviewing your business processes, and figuring out where things went wrong. Then, you will find out how you ran into the cash flow issue. Whether it could be a recurring issue considering the market and other contributing factors, strategize plans to deal with future setbacks.

2. Boost Profit Margins 

Go through your profit and loss statements to account for your profit margins. Separate and categorize expenses i.e. jobs, clients, events, marketing tactics, products, etc. Based on the data you discover, you should adjust your business plan to focus solely on services that make the most profit. Decide now to let go of clients who may be costing you more money than you know. Optimize your pricing structure, identifying excessive expenses in your operations. 

3. Receivables 

No business, not even Tesla, is foreign to cash flow crises. When they faced a shortage in cash flow, they started taking in payments for giving pre-orders for the product before it even went to production. You can adapt some similar tactics for your respective industry:

• Ask for a deposit or partial payment in advance. Verify your clients understand the terms of payment.
• Send out invoices as soon as the product is delivered. 
• Increase the frequency with which invoices are sent to your business. Remember, the faster you ship the invoices, the faster you will get paid.
• Contact past-due clients. Request them to make at least partial payments.

4. Creditors

During such a crisis, limiting cash outflow helps immensely. For that to make happen, you will have to negotiate or inquire about delaying payments with your suppliers. Be honest with them, most likely they will be reluctant, but if they are loyal, they will support you through a crisis.

5. Borrowing, maybe?

A loan should generally be considered a backup option in this scenario. If you have developed a low-risk and high-profit strategy to bounce back already, then you may be more prepared to take on additional liabilities. However, be wary of using debt to avoid your cash flow issues at hand. Never use debt to pay other debts.

6. Capital from investors

Selling equity can be a powerful tool, improving a company’s working capital while bringing in a new business partner. Make sure that it’s actually a low-risk and high-profit case for your business. Failure to remember these details can be catastrophic. Don’t let a cash flow issue make you act upon poor judgments.

7. Reduce expenses

Double, triple and quadruple check your accounts payable.  Prioritize necessary expenses, removing any extraneous costs. Focus on only those who run your business and produce capital.

8. Sell assets

Some assets make you money, others may not. As simple as that. Though liquidating assets for cash can give you a quick fix, some assets may take significant time to reacquire. Be sure to discuss with your accountant and determine if your assets are a benefit or detriment to immediate cash flow problems.

Be it accounts receivable, accounts payable, or other outstanding issues, cash flow crises are all too common in business. Be sure to plan your solution and take control of cash flow as soon as possible. 

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