How to avoid a cashflow crisis, by Nwes business consultant Paul Gardner, Lynn News
One of the most common causes of business failure in the first five years is poor cashflow management. US Bank puts the figure as high as 82 per cent. But what can you do when the till runs dry?
Many businesses will try to drive out unnecessary cost. Typically, this means reducing overheads, sometimes staff costs but this can take time to work through to the cashflow and might even increase costs in the short term.
But there are several other measures to consider.
Putting up prices can have an immediate impact but clearly might make the business uncompetitive so needs careful thought. Tightening up credit control and making sure customers pay on time can also raise cash – even pre-payments or early settlement discounts can help bring in cash. If it’s a temporary problem using other sources of credit, such as credit cards, can also spread the impact of purchases but again will potentially cost. If you can get, or increase, an overdraft that could help, but remember these are repayable on demand and not always easy to get.
Invoice factoring (selling your unpaid invoices to a third party for a discount) can also work but will almost certainly impact profitability. Another easy strategy is to renegotiate credit terms with suppliers, especially if the business is in a supply chain where long credit terms are the norm. If the issue is critical, try talking with your suppliers which can often bring about some temporary respite and may win you precious time.
Small businesses might also want to review how they receive money from customers. Taking online or chip and pin payments is secure, and can be immediate, plus avoids the cost and effort of banking cash.
Of course, another clear strategy is to increase sales but again this could absorb more cash initially especially if you have to buy in more products, recruit or increase expenses prior to making sales.
Finally, before attempting any of these strategies any business owner needs to be sure that the issue of cashflow isn’t masking a lack of profitable trading – as not even a cashflow improvement will fix a loss-making business.
Whichever tactic you choose to explore, getting on top of cashflow is a real win-win.
Paul Gardner is a business consultant for Nwes with a decade of experience advising start-ups and helping organisations grow and develop.