October 8, 2014
Cash Flow Management Techniques – Manage a Crisis
If there’s one thing that can derail a business, it is not using the correct cash flow management techniques during a crisis. In fact, not effectively managing cash flow is one of the main reasons that almost two thirds of small businesses end up closing their doors within two years (even if they’re recording a profit on the books), according to the U.S. Small Business Administration.
So how can a small business learn from the cash management mistakes of others? We took a look at the cash flow management techniques that made some small businesses succeed with their cash flow, while others fumbled and ran into crises that stifled company growth or shut down business for good.
What is a Cash Flow Problem?
Before we delve into how to properly manage a cash flow problem, it’s important to understand exactly what cash flow is and how it works.
Cash flow is the money being transferred into and out of a business, especially as it affects liquidity (how much cash you have on hand).
For instance, your company may have billed out $100,000, but if a client who owes you $30,000 pays a month late, you won’t have that cash on hand and may need to replace that money temporarily to pay overhead expenses.
These types of cash flow problems almost always happen in a company’s lifetime, and if a business owner doesn’t plan for them, it can place a huge strain on the business or even shut down operations.
There are techniques that help manage a cash flow problem, though, and following these steps will help you figure out why you’re having a cash flow issue and how to find a solution.
Effective Cash Flow Management Technique – Identify Source of Deficit
Effectively managing any type of cash shortage starts with a cash flow analysis to identify the source of the cash deficit. Maybe your clients didn’t pay their bills on time, you ordered too much inventory, or an emergency required a large unexpected outlay of cash.
Whatever the reason, understanding what caused a lack of liquidity in your bank account can help you take the necessary steps to fix the problem and make sure that it doesn’t happen regularly.
Develop a Temporary Cash Flow Solution
The next step in managing a cash flow problem is to find an immediate temporary solution. If you’ve planned ahead, you’ll have a business line of credit or borrowed money to pull from until you get your cash flow back on track.
If you don’t have a source of credit to cover your expenses in the short-term, there are other ways to manage cash flow temporarily. One way is to negotiate paying vendors at a later date.
Many vendors – especially other small businesses – will be understanding and be willing to work with you to negotiate a later payment date since it’s in their best interest for you to continue to be a customer.
Other ways to quickly secure cash are to temporarily discount prices to increase sales (this obviously isn’t an option for every type of business), as well as selling off additional inventory or equipment.
Balance Future Income and Outlays to Prevent Future Crises
Once the immediate cash flow crisis is solved, it’s important to take a look at your cash receipts and cash outlays in order to manage cash flow coming into and leaving your business. This can help prevent future cash shortages, and will certainly help alleviate stress associated with cash flow issues.
Many business owners also try to implement policies and processes that can help them avoid a cash crunch in the future, such as offering incentives to customers or clients that pay before their bill is due, finding ways to cut overhead costs, or revamping their inventory ordering schedule to allow more cash to stay in their bank accounts.