Manage the cash crunch

Identify the reason for your cash crisis

• External factors have caused a sudden drop in demand.
  At times, things that happen locally or globally impact what customers buy, which you have no control over. Pandemics, earthquakes, floods, new inventions, and changes in legislation can all affect your sales. Develop a contingency plan on what to do before disaster strikes.
• A major customer hasn’t paid on time.
  Implement stricter credit control and better debt collection procedures. Contact customers to ensure you have the correct purchase order and the invoice has been sent to the right person. Check if your contact has gone on vacation and forgotten to process your invoice (it does happen).
• A rise in the cost of production has eroded your profit margin.
  Try to source less expensive materials or supplies or decide to raise your price. Monitor your gross profit margin on a more regular basis for any further profit slippage.
• Your business overhead has increased.
  Identify specific expenses and see how you can reduce them. Check your net profit margins to spot any out-of-proportion overhead increases so you can take action.
• Your business is growing quickly.
  You don’t have the capacity to fund the growth with 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. See if you need to slow down: don’t accept every new job or order. Select only the most profitable and those that pay on time.
• Sales have been slower than predicted.
  Review your marketing plan and sales campaigns. Alternatively, if you can’t see any future improvement in sales, make sure your business is still viable by returning to your original feasibility plan to see what went wrong.

There may be other causes, such as losing a major contract or buying a large asset at the wrong time, and you now need that cash reserve for working capital. In each case, understand the cause and the action you’re taking to avoid repeating the crisis, such as diversifying your customer base or using your cash flow forecasts to time purchases more appropriately.

If you find yourself in a cash crisis, there are several funding options to consider, ranging from self-financing and bank loans to 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.
 

Find internal funds

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

• Offer customers a discount for early payment or ask them to pay upfront
• Ask customers to pay by credit card now rather than invoice for payment later
• Hold a sale of surplus or slow-moving stock to raise cash
• Ask suppliers to take back excess inventory and give you a credit or longer payment terms
• Sell under-used assets and rent the equipment only when you need it
• Downgrade or sell vehicles to raise capital and lease them back with monthly payments
• Reduce your drawings from the business until revenues improve.

Your accountant and advisors may be able to suggest other ways to release the locked-up cash in your business.
 

Apply for a bank loan

If you need a business loan and have a good credit history, consider a higher line of credit or access to a business loan. If you need a significant amount of money, you’ll likely have to present a detailed business plan and financial forecast.
 

Take on investors

A business partner might be a source of capital. There are advantages but pitfalls to taking on a business partner, so get expert advice first from your accountant and lawyer; they may also know suitable investors. Be aware that you’ll need to share the ownership of your business if you go down this path.