Cash flow is the lifeblood of your business. Without positive cash flow, you won’t have the capital available to make purchases and keep your business running—even if you’re profitable on paper. For example, you may have $25,000 in outstanding invoices, but owe $20,000 in expenses; even though you’re hypothetically $5,000 ahead of the game, if you aren’t able to collect the revenue necessary to cover the gap, you could face serious consequences.
The problem is a common one; it’s estimated that cash flow problems end up causing 25 percent of businesses to fail. The best way to address this problem is to prevent it from becoming a problem in the first place, with proactive measures designed to keep your cash flow positive. But if things get bad, and cash flow starts getting tight, there are some strategies that can help you reverse that financial momentum.
Cash Flow Is Tight: What Now?
Let’s say cash flow is becoming a serious issue. What can you do to help your business recover?
Aggressively Pursue Payments
Chances are, you have invoices submitted that are past due. This is your chance to aggressively pursue that income; after all, you’ve already earned it. If the invoice is just a few days past due, consider giving your customers a gentle warning over both email and a personal phone call (to ensure they get the message). If you still don’t receive payment, follow up firmly but politely, and if they still haven’t given you a plan for how they’re going to pay within a few weeks, you may want to threaten legal action.
Factor Your Invoices
If you’re having trouble getting payments for your past due invoices and you need cash immediately, you can always factor your invoices using a third party. The idea is to essentially sell your invoices to another company for slightly less than the full value of the invoice; they’ll then follow up with your customer to secure their own payment. If you use one of the invoice factoring solutions, you can reclaim close to the full value of the invoice in question.
Delay Accounts Payable
If you’re stuck without liquid cash to cover your expenses, consider strategically delaying payment on some of your accounts. It’s a common practice to delay payment until the last possible due date; you can start there if you aren’t already doing it. From there, you can choose to wait a few extra days to a few weeks to pay your vendors, depending on your existing relationship with them and what penalties are associated with late payments.
If you owe significant sums of money or if you have long-term contracts in place, consider renegotiating your terms. You may be able to temporarily lower your minimum payments or your interest rates with a creditor if you explain your situation. Similarly, if one of your vendors or partners knows you’re going through a rough patch, they may be willing to cut you a break temporarily.
Open New Credit
If you need more money flowing immediately, you can always consider opening a new line of credit. As long as your business has a strong credit score, or if you’ve been in business long enough to prove you’re capable of making money, you shouldn’t have an issue getting favorable terms and relatively speedy approval. If your business is new, you may want to consider opening a personal line of credit to supplement your needs—but that comes with personal risks as well.
Slash Operating Costs Temporarily.
You can also free up cash by dramatically reducing your operating costs—at least for a short period of time. You can do this by shutting down the office for a day or two or asking your employees to delay receipt of their paychecks. In more extreme cases, you may even consider breaking your lease and downsizing to a smaller office space.
Secure New Sales.
Your cash flow problem will disappear entirely if you bring in new cash to keep things moving. Stepping up your sales game and securing more down payments and initial installments will help you compensate for your shortfall. Of course, this relies on you having a strong sales team in place to close those deals.
If you’re faced with negative cash flow without momentum in any of the above strategies, you may need to resort to some type of bankruptcy. That doesn’t necessarily mean your business will fail; in fact, you can reorganize your business and restructure your debts in many cases to prevent that possibility. It’s not good for your credit or reputation, but it will keep your business running and give you a second chance at success.
The Ideal: Proactive Management
Of course, the best strategy for cash flow management is still keeping things positive and consistent in the first place. If you’ve recently recovered from a cash flow issue, you should use this time to readdress your approach:
Designate an Authority
Choose someone in your organization, preferably with a strong financial background, to be in charge of monitoring cash flow. They should know immediately if you’re ever in danger of going negative, and be able to take action accordingly.
Understand Your Profitability. Dig deep to understand whether your business is profitable, and be on the lookout for any expenses that could compromise that profitability.
Have Clear Standards in Place. Finally, establish clear, consistent practices in your accounting department, issuing invoices in a timely manner and following up with them automatically if they aren’t paid within the designated timeframe. This follow-up process can increase your payment rate—and therefore your incoming cash flow—dramatically.
Cash flow is a problem that can, thankfully, be solved in many different ways. If you find yourself in a temporary pit, consider all your options before moving forward, and put the safeguards in place to ensure you aren’t found in the same position again.