Managing A Cash Crisis

Published on June 9, 2021 |

Dealing with a sudden cash flow shortfall can absorb your attention when you should be focused on other tasks.

Even if you’re working hard to avoid shortfalls, cash flow issues can pop up despite your best efforts. A formerly reliable customer might take much longer to pay than anticipated or a large consignment might fail to show up, leaving you out of pocket.

If you’re starting a business, it could simply be taking longer than expected to turn a profit.

THE IMPORTANCE OF FORECASTS

Time gives you options. If you suddenly find yourself in the middle of a cash flow crisis, your options are limited. The way to gain more time is through a cash flow forecast. A realistic forecast shows lenders that you’re looking ahead and actively managing your cash flows.

If you don’t already use cash flow forecasting, start by preparing both a best and worse-case cash flow forecast, so that you have a good idea of what your future financial needs will be.

IDENTIFY CAUSES  

Your forecast may also help you identify what caused the cash flow crunch. Lenders will ask about the cause and you also need to understand the issue(s) so you can explain the changes you’re making to avoid a repeat event. Below are some common causes and possible solutions:

• A major customer hasn’t paid on time. Do you need to implement stricter credit control and better debt collection procedures?
• A rise in the cost of production has eroded your profit margin. Can you source less expensive materials or supplies, or do you need to raise your prices? Are you monitoring your gross profit margin for any further profit slippage?
• Your business overheads have blown out. What specific expenses have increased and how are you going to reduce them? Are you regularly monitoring your net profit margins to spot any out of proportion increases so you can take timely action?
• The business has been growing rapidly. Is your business growing faster than your capacity to fund the growth (your working capital)? There’s usually a time gap between selling goods or services and getting paid by customers. Meanwhile there are bills to pay. Do you need to slow down to avoid failure through overtrading?
• Sales have been slower than predicted. What steps have you taken to change this? When are sales likely to improve? Alternatively, if you can’t see any future improvement in sales, is your business still viable?

There may be other causes such as the failure of a major contract or asset purchases you’ve made at the wrong time. In each case, explain the cause(s) and the action(s) you’re taking to avoid a repeat, such as diversifying your customer base or using your cash flow forecast to time purchases more appropriately.

INTERNAL FUNDS

Before you look for external sources of funding, can you free up cash from within your business? For example:

• Offer customers a discount for early payment or ask them to pay immediately by credit card.
• Hold a sale of surplus or slow-moving stock to raise cash quickly.
• Ask suppliers to take back excess stock or give you better credit terms.
• Sell underused assets and rent the equipment instead, as and when required.
• Downgrade or sell vehicles and lease instead.
• Reduce your drawings from the business until revenues improve.
• Consult with your accountant and advisers who may be able to suggest other ways to release the locked-up cash in your business.

SOURCING FINANCE

There are a number of funding options to consider, ranging from self-financing or bank loans through finding a business partner. The relative attractiveness of each option will depend on the size of your cash flow shortfall and how long you’re likely to need the cash.

If you have savings, this might be a one-off cash injection. Alternatively, you can use your personal credit card to pay for some business purchases to ease cash flow or take out a personal loan to tide your business through a temporary rough patch.

SUMMARY  

If your business can’t afford to service loan repayments out of surplus cash flow, then it may need more capital. This might apply for instance in the case of a new business that may need more than a year to break-even.

Note: This article is for information purposes only and is not accounting or investment advice or an offer to lend.