How to deal with cash flow shortage (10 solutions for your small business)

How to survive a cash flow crisis plus how to solve cash flow problems in a small business

Most businesses will experience a cash flow shortage, and it’s knowing how to handle the shortage of cash. How the cash flow shortage is dealt with could mean the difference between whether your small business survives or not. So let’s take a look at how to deal with cash flow shortage in more detail.

How to deal with cash flow shortage in 15 seconds…

How you deal with a cash flow shortage is to first prepare a cash flow forecast and an updated business plan. This will help you to plan your way out of the cash crisis and will be needed for the bank if you require bank finance to resolve the cash shortage. Other options include renegotiating supplier payments terms, accelerating customer receivables, reducing your overheads and managing your inventory or stock levels more efficiently.

Cash flow crises are more common than people would think. This topic is particularly topical with the current impact of Covid-19 on cash flow for all businesses.

It’s all to easy for your small business to become overextended. This can happen if your industry is experiencing a downturn. It can happen if your country is going through a recession or as all businesses are experiencing cash flow shortages are happening with the Coronavirus or Covid-19 pandemic.

If you have a cash flow shortage right now, here are a few tips on how to get though your crisis.

Cash flow solutions and cash flow management techniques:

1. Prepare a cash flow forecast and business plans.
2. Make contact with your bank or other lenders.
3. Renegotiate your payment terms with your major suppliers.
4. Accelerate your customer receivables.
5. Consider invoice factoring.
6. Consider raising money through an investor.
7. Reduce your costs and overheads.
8. Consider staff redundancies.
9. Sell-off your non-essential assets to generate cash.
10. Manage your inventory more efficiently and reduce your stock levels down.

Let’s now take a look at each of these cash flow solutions in more depth.

1. Prepare a cash flow forecast and business plans

Having well prepared cash flow forecasts together with an up to date business plan will not only help you to see your way though the cash flow shortage, but it will also be necessary to present to your bank if you intend to seek bank funding to see you through the cash flow blip.

2. Make contact with your bank or other lenders

I would definitely recommend you make contact with your bank sooner rather than later. All lenders are much more willing to support your small business if you speak to them before you’ve reached the point where you are missing debt or supplier payments.

If you already have bank debt, you could begin with a renegotiation of your current funding. Banks are often willing to look at payment holidays. Or alternatively, you could look at further short term finance to see you through the cash flow crisis, but this is where the cash flow forecast will be important to have, as this will demonstrate how much the cash shortage is.

3. Renegotiate your payment terms with your major suppliers

One of the best sources of short term finance is to obtain credit from your suppliers. One advantage of this method to help with a cash shortage is that supplier credit is free to get.

Most companies are happy to offer credit, but don’t charge interest on the period allowed for payment of the account. However, wither or not your suppliers will be will to offer extended credit terms will depend on the suppler concerned and your businesses credit rating.

4. Accelerate your customer receivables

One of the easiest ways to receive a quick cash injection is to step up your collections relating to customer debt. Also, if your customers are taking advantage of long credit terms, shortening these terms will impact positively on your available cash balance.

For example, if you presently allow customers 60-day payment terms, you could try shortening this to 30-days or even less. The shorter the period, the better the improvement of your cash position.

Review your invoicing system and improve how quickly you send out your invoices to your customers.

5. Consider invoice factoring or financing

Whilst invoice factoring or financing isn’t cheap, it is a great way to improve cash flow immediately. If your business lacks significant assets to offer as security for bank lending, invoice factoring is a good alternative. This is because the bank effectively takes a security over your trade debtors.

However, this is not an option if your customers are individuals, in other (i.e. B to B).

6. Consider raising money through an investor

An alternative to borrowing money from a bank is to look for an investor. This type of finance is totally difference and is likely to mean you’ll have to give away a percentage of your shareholding in your business to the investor. But always remember, if you have an investor on board, you then have someone else you are reporting to.

7. Reduce your costs and overheads

Most businesses are able to cut down their overheads or running costs. It’s only when you face a cash shortage that you begin to focus on this area of your business. It’s easy to look at wasted costs and review what’s an unecessary cost that can be cut.

8. Consider staff redundancies

Making staff redundant isn’t a great thing to be doing at any time. This is quite a stressful process to go through, both for the business owner and for the people being made redundant.

Think carefully about this option, as this can seriously damage moral within your business. Any business that goes through a redundancy process will find employees feeling quite insecure.

9. Sell-off your non-essential assets to generate cash

One option to raise some quick cash is to ell-off your non-essential assets. But of course this assumes you have unnecessary equipment lying around, plus on the understanding it has a cash value to someone else.

On the other hand, if you don’t have non-essential assets to sell, but you do have assets that are able to be financed, you could raise money against these. This is subject to the age of the assets of course. Or you could sell the assets you own and lease new assets.

10. Manage your inventory more efficiently and reduce your stock levels down

If your business deals with stock or inventory, a good way to improve cash flow or working capital is to reduce stock levels down. Spend time carefully revewing your stock levels and your inventory turnover ratios. Any stock that is turning over slowly, but where you have excess stock, make sure to reduce these levels down by not replacing stock as it’s sold down.

Also, review how profitable each stock line is to your business. Consider selling off any low profit items or certainly any that a producing a loss. Unless of course these are loss-leaders that are important to your business and popular with your customers.

I hope you enjoyed this article about how to deal with cash flow shortage

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