Despite our best intentions and best-laid plans, there are times when a small business can run into a cash crunch. When that happens, the key is to act quickly and decisively so that you can turn around the situation and avoid any potential financial calamity. These are a few tips that can help you survive a cash shortfall.
Tighten credit. Be cautious when providing credit. Run a credit check on new customers and consider requesting references. Get a Dun & Bradstreet report on them and have them fill out a credit application. Check references. Consider accepting credit cards.
Encourage early payments. Offer clients a discount if they pay in full within a limited time. A 2% discount, for example, could be a small sacrifice to get access to urgently needed cash.
Delay or stretch your payments. If cash is truly tight, wait as long as possible before your business makes its payments.
Factor in some help if needed. Use a factoring service if you’re having problems collecting on your receivables. You’ll have to pay a substantial fee – possibly 15% of what is collected – but you’ll be relieved of any further frustrations associated with collecting on overdue accounts, and you’ll at least have 85% of your billed amount in hand. Find more information on factoring here.
Conserve cash. Look critically at purchases, especially large ones. Consider making installment payments if you need to.
Talk with your vendors. If you’re in a temporary bind, explain that to your vendors. They might give you more leeway in making payments until your situation improves. If you have strong relationships with long-time vendors, they might be more inclined to give you a break, and that could also be in their long-term best interest.
Limit your inventory. Inventory that sits idly could be like atherosclerosis, a disease that slowly blocks arteries. Cash flow will keep your business running smoothly. Too much inventory, on the other hand, could, in extreme cases, lead to premature death. Monitor and limit your inventory. Keeping a close watch on daily sales activity can yield valuable information that could help you more accurately predict future sales and regulate inventory.
Identify problems early and act quickly. The earlier you can nip a problem in the bud and resolve it, the easier and less costly it will be. That’s the reasoning behind so many best-practice tips: to be proactive, effective and efficient in your cash flow management.