Small Business Cash Flow Problems
Small business cash flow problems are an issue that afflicts many small business entrepreneurs across the world. Here are my top tips for getting through crisis situations in relation to small business cash flow problems.
Reduce the cash tied up in the business’s operating cycle
Accounts receivable and inventory holding can be major drains on cash flow. In a crisis situation, it is key that the business owner reduces the money held in accounts receivable by assertively collecting outstanding customer payments. At the same time, the business owner must increase the inventory turn so that there is less cash tied up in inventory in the business.
Review and increase the business’s gross profit margins
Essentially, this means either increasing the sales price of the products and services sold or reducing the cost of producing the goods (cost of goods sold).
Reduce the operating expenses within the business
A business often incurs too many expenses for its size. With serious attention a business owner can heavily reduce expenditure and therefore improve cash flow.
Reduce sales volumes
By reducing the sales volumes, by default sales and the cost of goods sold will decline. As a result, inventory holding will decline as will the money tied up in accounts receivable. This method of cash flow control is difficult for small businesses to implement and, if undertaken for a considerable period, will require the business owner to substantially reduce operating expenses. This should be considered as an emergency response only.
Ask suppliers for extended payment terms
Delaying the payment needs to be a short-term solution for managing a negative cash flow as it can affect a business’s credit rating with its suppliers. Holding back on the payment of inventory and other operating expenses will have a positive impact on cash flow. The practise of delaying payment of invoices is illegal in some countries, so a better option is to proactively ask your supplier for extended credit terms to help your business through the cash flow crisis.
Borrow money
Borrowing money from banks, family or friends can help a business through short or long-term cash flow crises.
Find equity capital
If the cash crisis is ongoing, another option for a business is to find an equity partner that will contribute cash in exchange for a percentage of the business. This is fraught with danger if the wrong equity partner is found, as things can go very wrong in the business. Equally, it can be a real opportunity if the equity partner is genuinely interested in helping the business grow and become more profitable and successful. When considering this option, make sure your business gets the correct business advisory support to ensure the deal is not too one-sided in favour of the new equity partner.
Hold cash reserves
This is the pie-in-the-sky option for businesses existing hand to mouth each month and unable to amass cash reserves at the bank. Regardless, the only way in which a business will be less impacted by negative cash flows is to have a cash reserve. The best way to have a reserve is to put a bit of money aside for a rainy day during good times. I can promise you that after your business experiences a few nightmarish cash flow crises, you will never want it to happen again, so finding money to put aside for the future is the best way to protect the business for the future.
Perhaps it is comforting to know that most entrepreneurs experience small business cash flow problems. If you know Sir Richard Branson’s entrepreneurial story, you will know that on many an occasion his businesses had no cash, and the banks were close to closing him down.
The key is NOT to put your head in the sand and hope it goes away. Small business cash flow problems come with the territory of being in business. Be front footed in addressing the issues. Talk to people who may be able to assist – your customers (to get paid quickly); your suppliers (to get extra credit); your accountant (to assist in trimming costs from the business and other business consulting support); your bank (to get extended credit if possible); potential equity parties (if your business can sustain this option).
If you would like to learn more on how to address the cash flow issues in your business, then please go to www.adelemclay.com/free-resources and download my SPEARHead System™ – 50 Strategies For Supercharged Small Business Cash Flow.
Could some guidance from me be helpful to you? If so, please arrange a free 30 mins Skype strategy meeting with me. Here’s my calendar to book a meeting. I’d love to support you in some way to gain ‘seductive clarity’ in any aspect of your business or life.
Other articles on Small Business Cash Flow:
Small Business Cash Flow – The Ultimate Guide
Cash Flow Problems in YOUR Small Business
Small Business Problems – Why are YOU in Business?
Cash Flow in Business
Cash Flow Projections – Important in Business?
Projected Cash Flow – Relevant to Business?
How to Solve Cash Flow Problems: Inventory Turn
