Managing cash flow is a normal part of doing business. Nearly all businesses operate on a combination of cash and credit, making proper cash flow even more important. Poor cash management can lead to poor decisions that ultimately harm a company’s credit.
So what is a small business owner to do when cash flow starts getting dicey? There are three things that should be done:
- Secure a short-term solution
- Take corrective action ASAP.
Occasional cash flow challenges are normal for every small business. But if cash flow is a persistent problem month after month, there may be serious issues to contend with.
1. Securing Short-Term Solutions
The first step to managing poor cash flow is to come up with a short-term solution. Simply put, a small business needs cash to continue daily operations. Without it, the business risks going belly up. Thankfully, there are options:
Small Business Loans –
Lines of Credit –
Invoice Factoring –
When cash flow struggles are the result of having to make good on existing credit instruments, Actium Partners says a bridge loan might be a good option. The Salt Lake City hard money firm says a bridge loan can preserve cash by paying off the credit instrument and giving the business owner additional time to line up new financing.
2. Figuring Out the Source
Once a short-term solution has been found, the next step is to figure out the source of the problem. It could be just about anything. A best-case scenario would be one in which a small business simply isn’t collecting unpaid invoices quickly enough. They are giving their customers too much time to pay their bills.
Another possibility is that the business is spending more than it is taking in. And if that’s the case, there could be multiple reasons for that. Perhaps the business owner is not a good planner. Maybe unexpected capital expenditures recently came up.
A worst-case scenario would be a failing business. The company is losing customers and having trouble acquiring new ones. In such a case, there may be no saving the business.
3. Taking Corrective Action
Assuming a small company with cash flow problems isn’t actually failing, corrective action is necessary to make sure that failure never becomes a possibility. Cash flow problems are almost always indicative of more deeply rooted issues that can be corrected.
If a company is hurting for cash because Accounts Receivable is lax on collecting outstanding invoices, corrective action would involve policies and procedures designed to facilitate faster collection. That could mean reducing terms from 45 days to just ten. It could mean getting on the phone with customers on the first day payment is late.
Cash flow problems caused by disproportionate labor costs are second only to a failing business in terms of seriousness. Unfortunately, the only solution is to reduce labor costs through layoffs, hiring freezes, benefit reductions, etc.
Tight cash flow is expected when you run a small business. From time to time, cash reserves get low despite financial obligations staying the same. Addressed properly however, cash flow problems should not threaten a business. If they do, there are serious underlying issues that need to be taken care of.