It’s the scenario that every business owner dreads – the money runs out. This can be a very frightening and uncertain time for any business, regardless of size or longevity. No one ever plans on their business running out of money – in fact, the lack of a plan is normally the reason why it happened! However, if it does happen, what can be done quickly to turn things around?
It’s important to remember that there are options available to you when your business finds itself in this situation. There are many things you can do to get your business back on track – it all comes down to knowing what those options are and taking action.
If you are in any doubt about the financial stability of your business, its ability to meet its debts when they fall due or your ability to take action, then we would always recommend an early conversation with your accountants or a turnaround professional, but in this post, we will be looking at what you can do when your business is facing a cash flow crisis, we will also be looking at ways to ensure a positive financial future for your business once you are through the cash flow crisis.
When the Cash Flow isn’t Flowing.
The first question to ask is ‘why isn’t the cash flowing?’ There could be a number of reasons, and there could be something that’s easily rectified. Look at your income and expenses, as well as any outstanding debts or loans. It might be the case that:
- Your sales aren’t meeting targets.
- You have too much stock.
- You’re not invoicing correctly or at the right time.
- Customers are taking too long to pay you.
- You’ve overspent on marketing or other areas of the business.
- There was an unexpected dip in sales.
Once you’ve pinpointed the reason or reasons why your cash flow has come to a standstill, you can start to put together a plan of action to get things moving again. Depending on the situation, there are a few different things that can be done. If your issue is that …
Customers are taking too long to pay you.
Consider introducing a new invoicing system that offers shorter payment terms or offer discounts for customers who pay their invoices quickly (although this may impact some future profit). This is common among many businesses big and small, but it’s important to make sure that you are getting paid on time. Effective credit control is essential, and you should chase up any payments that are overdue.
You have too much stock.
See if you can offer discounts to clear it out quickly or negotiate better payment terms with your suppliers so that you have more time to sell the products. Remember goods just sitting on the shelves is cash that needs to be in your Bank.
Your sales aren’t meeting targets.
Consider changing your marketing strategy or introducing new products or services that will appeal to your target market.
You’ve overspent in one, or several, areas of the business.
Monitor overheads and cut back on spending in other areas until you’ve regained control of the situation.
Also, if you have …
Made large and unnecessary purchases.
It’s important to be mindful of this in the future. Avoid making large purchases that are not absolutely essential for your business. Before making any big purchase, ask yourself if it is something that you really need and if it is the best use of your resources.
An unrealistic sense of how cash flows in the business.
This is one of the most common mistakes made by small business owners and can have a very detrimental effect on your business. It’s important to have a clear understanding of your cash flow so you can make informed decisions about how to best manage your finances. If you’re not sure, don’t guess. Seek professional business finance advice.
Failed to negotiate with suppliers and creditors.
You may be surprised at how willing suppliers and creditors can be to negotiate alternative payment terms. It’s always worth asking for a discount or extended payment terms – you may be surprised at what you can achieve!
Seeking professional help.
If you find yourself in a situation where your business has run out of money, it is important to act quickly. The worst thing you can do is ignore it and hope for the best. This isn’t going to help or resolve your situation. A suitably qualified and experienced advisor can help you make sound decisions about how to best manage your company’s finances.
Looking into External Additional Finance Options.
Another option is that you look for an additional finance solution to tie you over in the short term or opt for one that offers a longer-term financial solution. There are various options available when it comes to financing your business. You can take out a loan, use credit cards, or seek investment from friends or family members. Each option has its own benefits and drawbacks, so it is important to weigh up all of your options before making a decision.
These options generally consist of:
A business loan – this could be from a bank, the government, or another financial institution. The terms and conditions will vary depending on the lender, but outside of special government support schemes, you will typically need to provide a personal guarantee and collateral, such as property or a debenture over the company’s assets to secure the loan.
A business overdraft – this is an extension of your current account that allows you to borrow money up to an agreed limit. The interest rates are usually higher than a business loan, and you will often need to provide security, such as property or a debenture over the company’s assets, and a personal guarantee to secure the overdraft.
A line of credit – this is a type of loan that allows you to borrow money up to an agreed limit and then repay it over an agreed period of time. Again, you will generally need to provide security to secure the line of credit.
A venture capital/business angel/equity investment – this is when an investor provides funding for your business in exchange for a stake in the company. This is typically only an option for businesses that are growing quickly and have the potential to make a large return on investment and it normally takes many months to get in place.
An asset finance solution – this is when you use your business assets, such as property or equipment, to secure a loan. The terms and conditions will vary depending on the lender, the most typical is sale and leaseback when you sell the asset to the lender (but retain control of its use in your business) obtaining a cash injection from the sale price and then paying a monthly or quarterly lease payment over an agreed term.
An invoice financing agreement – this is when you sell your outstanding invoices to a lender in exchange for a lump sum of cash and then repeat the process ongoing as new invoices are generated. The terms and conditions will vary depending on the lender and the type of invoice finance taken, but this type of finance solution comes with a wealth of both long- and short-term financial benefits as it provides ongoing ready access to working capital, immediately bridging the cash gap between paying and when paid. Typically, a debenture is taken from the company and director’s guarantees or warranties.
Creating a Framework for Positive Cash Flow.
Once you have started to sort out your cash flow issues using the options detailed above, it’s time to create a positive cash flow framework. A framework is simply a set of parameters or guidelines that help you make decisions about your business.
There are a few essential elements that you need to include in your framework:
- A clear understanding of your income and expenses: You need to have a clear understanding of where your money is coming from and where it’s going and the timing of this. This will help you make informed decisions about your cash flow.
- A budget: A budget is a crucial tool for managing your cash flow. It will help you track your income and expenses so that you can stay on top of your finances.
- Guidelines for making financial decisions: You need to have guidelines in place for making financial decisions. These guidelines should include what criteria you use to decide whether to make a purchase, how to prioritise expenses, and who to offer credit to.
- A tracking system: You need to have a system in place for tracking your cash flow, including any seasonal peaks and troughs. This will help you identify trends and make necessary adjustments to keep your cash flow positive.
- A plan for managing debt: If you have debt, you need to have a plan for how you’re going to manage it. This includes making regular payments and ensuring that your debt doesn’t get out of control.
- A contingency plan for when things go wrong: Things will inevitably go wrong from time to time, so it’s important to have a plan for when they do. This way you can minimise the impact on your cash flow.
By having considered all the issues and having an unobstructed vision, you’ll be able to develop a workable and effective framework that works for your business. A framework for positive cash flow is an essential tool for any business owner. By creating one, you can avoid financial mistakes, plan for the future, and be better placed to make sound financial decisions.
If your business is currently suffering from an unhealthy cash flow, then contact Partnership Invoice Finance for information and guidance on how an invoice finance solution could be the answer to your financial problems.