Explore the following six strategies to address cash flow problems in a small business:
- Improve collections: Improve cash collections by streamlining the invoicing process and following up promptly on overdue payments. One should consider offering incentives for early payment or negotiate payment terms with one’s customers.
- Reduce expenses: Evaluate operating expenses and identify areas where costs can be reduced. Consider cutting back on non-strategic, discretionary spending. Try to negotiate better deals with suppliers.
- Increase sales: Easier said than done, focus on boosting sales by expanding the customer base. Introduce new complimentary products or services and evaluate the company’s marketing efforts to see if it can be done more effectively. This however, usually takes longer to implement and is less effective in resolving a cash deficiency in the near term.
- Improve cash management: Improve cash management by monitoring cash flow regularly. Forecast future cash needs, and take the steps needed to manage working capital more effectively. The easiest approach to improved cash management is to utilize a 13-week cash flow forecast. Learn more about the 13-week cash flow forecast here.
- Prioritize vendor payments: Faced with a cash crunch, it may become necessary to prioritize which vendor get paid and which get delayed. A typical prioritization structure may prioritize employee related expenses first which would include payroll and benefits. Next, one might pay rent and utilities to keep the doors open. After which, a business owner might pay loans and debt obligations to avoid default. Lastly, strategic vendors are prioritized over all other vendors and paid when the cash is available to cover these commitments.
- Seek short-term financing: Explore various financing options, such as loans, lines of credit, or invoice financing, to help address cash flow requirements. Make sure to compare the costs and terms of these options to determine which ones are the best fit for the business.
Remember that it is essential to review financial statements monthly after the books are closed. Review cash flow projections weekly to stay on top of cash flow. This cadence allows a business owner to take proactive steps to address any cash flow problems as they arise. By taking a proactive approach to cash flow management, business owners can improve their financial stability and increase the likelihood of business success. 20 ways to improve working capital
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