Cash flow is a constant challenge for many small to medium businesses.
There are many reasons why businesses run into a cash flow crunch – it could be slow debt collection, bad debt, seasonal sales fluctuations, over-investment in capacity, or too much stock.
Whatever the cause, a cash flow crunch can be a threat to business survival. If you are experiencing a cash flow crunch, here are a few things you can do to work your way through it.
1. Create a Cash Flow Statement
A cash flow statement is a critical tool for managing your finances. It shows the funds flowing in and out of the business each month. You can create a cash flow statement using most business accounting software programs. You can also create a cash flow statement with a template from www.business.gov.au.
2. View your Accounts Receivable Report and collect your debts
Your Accounts Receivable Report is a good place to start because unpaid debts are one of the biggest causes of cash flow problems in Australia. In fact, each business in Australia is owed $38,000 on average. That’s a large chunk of money if you run a small business that’s struggling to pay its bills.
After you have determined who owes you money, take action. This could include getting on the phone to get paid. For customers who are excessively late – over two to three months – it’s time to call in a collection agency to chase the debt. Most collection agencies work on a commission basis on a sliding scale, depending on the size of the invoice. The higher the invoice amount, the lower the percentage you will pay. If you have invoices that are overdue, it could be worth paying 10% to 25% to a collection agency to get the money you need to improve your cash flow.
3. Negotiate to delay payments
This might sound a bit cheeky after what was suggested in the previous section. The difference is that you are being transparent with suppliers and asking them if you can delay payments. If you are a longstanding client, your suppliers are likely to understand your situation and let you delay payment for a short time. You can also work to negotiate better payment terms. If you’re being billed on 15-day terms, ask if you can change this to 30 days.
4. Ask for discounts from suppliers
This relates to the previous point, but you might not be able to do both. If you make large purchases from a particular supplier, ask for a discount. Even a small amount can add up. If it’s a large purchase you make regularly, getting a discount will help you boost your cash flow.
5. Dispose of assets you are not using
Look around at your assets and determine whether you are using them. There are probably things that you bought in the past that were useful at one time but you don’t use them anymore. For example, if you purchased a vehicle for delivering your products in the early days but you are now outsourcing this, it might be time to sell this vehicle to improve your cash flow.
6. Create a sales promotion to sell old stock or fill excess capacity
If you sell products, consider selling old stock at a discount. Inventory that’s not moving is bad news for your cash flow, so it could help if you lower the price to get it out the door. If you are in a service business, paying for unused capacity will diminish your cash flow, so take action to sell more services, especially those delivered over a short time frame that you can invoice for sooner and get paid.
7. Stop any spending that’s not essential
If your business is like most, you probably have quite a few non-essentials that you purchase regularly. For example, if you use air travel for business meetings, consider online meetings to reduce your expenses. You will also want to think about the small things like turning off lights and computers when not in use.
8. Raise your prices to improve cash flow
Cash flow problems can sometimes be the result of not charging enough for your products or services. If you seem to be making plenty of sales, but your cash flow is hurting, your prices might be too low. Scan the market to see what other businesses are charging. If you seem to be at the low end of the scale, consider raising your prices to improve your financial health.
9. Get a loan to improve your cash flow
When experiencing a cash flow crunch, you have many short-term lending options available. Some of these include a business overdraft, line of credit, invoice finance, merchant cash advances and short-term unsecured business loans.