Cash flow problems are often serious concern for any business. In today’s world, unstable economic conditions are making it increasingly difficult for small and medium businesses to maintain a steady source of cash flow. However, a cash flow problem doesn’t necessarily stem from negative cash flow. It could come from making a huge payment, leading to the business having a net cash outflow. Persistent negative cash flow can lead to grave problems for the business.
Negative cash flow can come from many sources, such as:
- Consistently low profits or large losses
- Holding too much stock
- Heavy expenditure on capacity through purchasing fixed assets
- Business engaging in over trading by expanding too quickly, and
- Seasonal changes in demand, which are predictable and can be minimised
There are many tactics you can employ to avoid cash flow problems. One such important one is to devise a cash flow projection. It should be like a business plan and should not only include potential strategies for enhancing cash flow, but have an arrangement in place for the timely payment of debt. When creating this strategy, you should take into consideration the many financing alternatives available, and select the best one.
Another method that businesses can employ is to speed up the cash collections from debtors. This can be achieved through numerous ways, such as:
- Sending out your invoices promptly
- Offering incentives to debtors such as cash discounts for early payment
- Making sure you have an efficient follow-up process when repayments fall late
- Ask for a down payment upfront that can improve their cash flows to a certain extent
- Making offers such as accepting a lesser amount than the one actually due (if a debtor who is extremely late in paying can pay quicker this way)
If the business is, on one hand, trying to speed up the process of money collection, it could on the other hand, be attempting to delay or renegotiate payment that is due to its lenders. Businesses can renegotiate with both the lenders and suppliers on the terms of their contracts, in order to improve their cash flow situation. These can help the business attain extensions on the due dates of payments and should be made before the debt is due so that suppliers and lenders know that the business is in a tough situation and is being honest about it.
Important in solving cash flow problems is reducing the costs of the business. It should be noted that businesses need to be very cautious if considering cutting costs.
You should try your best to avoid making reductions in the salaries of employees, but can cut back on bonuses and any increase in the pay scale during times of financial distress. One positive initiative can be taken to cut down on cost is to go green. Cost cuts can be found by adopting certain environmentally friendly practices (for example regulating the thermostats by turning it up in warm weather and lowering it in the cold weather) when people are not in the office. Even measures such as using conference calls and e-conferences can cut down on costs, as they can reduce money spent on travelling, and have the plus side of being environmentally friendly. Most cash flow problems can be resolved if dealt with early enough.
Finally, another effective cash flow management method tackles insufficient cash through using sales. Customers benefit through temporarily buying goods at heavily discounted prices, especially on superseded or overstocked products. Any business must be careful to ensure it has means to restock its inventory once sold out, so it isn’t left with zero stock levels.
Most cash flow problems can be resolved if dealt with early enough. The simple measures that are discussed above are easy and practical for both small and medium businesses to adopt. They can yield very effective results as long as they are followed and applied.
This is an excerpt from Kyle’s book, Ducking and Weaving: Dodging Legal Blows in Business
Tagged in: business costs, business plan, cash discounts, cash flow, cash flow problems, cash flow projection, creditors, debt payment, debtors, discounted price, down payment, early payment, employee salary, invoices, late payments, low profits, payment of debt, stock levels, upfront payment