Cash flow is the lifeblood of business but what happens when it runs out?
Despite the best efforts of managers, many businesses find themselves in this position at some point even if they are profitable. There can be a myriad of factors at play from the macro to the micro, such as recession causing a slump in sales or a formerly reliable customer taking longer to pay.
Businesses faced with a cash flow problem need to enact a clear strategy within a tight timeframe. Strong leadership, good communication and flexibility are required.
Assessing the Problem
The first step to resolving a cash flow crisis is to quickly identify the cause. A delay in dealing with a cash flow problem reduces a business’ room to manoeuvre and can push a situation from tight to impossible.
Managers should start with an honest, comprehensive assessment. It needs to be realistic and done efficiently but sufficient time and resources should be applied to it in order to gain a proper understanding of all the issues.
Once the causes are established, businesses can begin to formulate tactics and strategies to resolve the problem.
Forecasting Cash Flow
Reviewing cash flow and preparing a cash flow forecast will give a business the confidence to plough on with any changes once a crisis plan is put into action. It can also provide more short-term options; for example where an overdraft is sought, lenders are likely to require a business plan.
By measuring planned income and expenditure against what has actually been earned and spent, managers can also pinpoint variances and think about what caused them. That way it should be possible to determine whether the cash flow crisis is it a one-off occurrence or an indication of an underlying problem.
It will also ensure that managers focus on how to implement changes without squeezing cash flow further.
Measures to Ease a Cash Flow Crisis
Once the cash flow problem has been properly assessed, there may be a number of possible measures that can be implemented to deal with the immediate crisis. Generally these will entail trying to release cash that is tied up in the business.
Negotiating early payment of invoices by customers and extending terms with suppliers can be very effective, particularly if it is only required in the short term. Bear in mind that while trade creditors may be flexible, other creditors such as tax authorities and landlords should be treated with greater caution.
Businesses may also seek to sell underused assets or rent equipment when it is required rather than buying it. A sale of surplus stock can also free up cash quickly.
Discretionary spending should be cut back but the longer term consequences of reducing advertising and other soft targets should be borne in mind.
If internal measures are not enough to escape a crisis, external funding sources may have to be sought.
Borrowing Your Way Out of a Cash Flow Crisis
Before taking on more debt to finance a business, managers should make sure that it is in the best interests of the company. A profitable business that has simply run short of cash is often worth saving with an injection of borrowed money. But if a cash flow shortfall is more than temporary there may be no point in pouring borrowed cash into the business and exposing lenders to probable losses.
If a cash shortage is likely to be temporary, there are a number of financing options to tide businesses over. These range from personal finance, friends and family, bank loans, debtor finance or partners and investors. Each option has its own perks and pitfalls, so a review of the costs associated with each is critical.
Managing Stakeholder Relationships
It is important to remember a cash flow crisis requires skilled relationship management. Managers must be proactive with the key stakeholders. The aim is to ensure that once a business has weathered its cash flow crisis and operations return to normal, business relationships remain in good shape. Businesses faced with a cash flow crisis should seek professional help; contact our expert, Richard Malone