Take Immediate Action to Stem a Cash Flow Catastrophe
Cash flow problems don’t always creep up on a business. Sometimes, a single event can cause a shortage of cash. A customer might unexpectedly cancel a significant order, for example, or be late paying a high-value invoice, or you might have overlooked a large payment that must be made.
When facing an imminent and critical cash flow crisis, you must take immediate action. But steps like increasing prices or cutting costs will take time to have an effect. Instead, you will need to find ways to improve the cash position in days or weeks, not months or years. Here are some tips to help you manage what might appear to be an unmanageable short-term cash flow crisis.
1. Hold All Outgoing Payments
As soon as you realize there will be a problem, it is best to take steps to prevent the situation from worsening. Developing an emergency cash flow plan is going to take time. So, hold all vendor payments while you gather information and assess the situation.
Withholding all vendor payments may seem like a drastic step to take. But paying bills a few days late is unlikely to cause any significant issues, and delaying payments will give you time to prioritize outgoings and consider all your options.
2. Assess the Full Picture
If you tackle only the immediate issue, you may find yourself going from one crisis to the next. So, you will need to look at the bigger picture when dealing with a short-term cash flow issue. So, the next step is to ensure that your accounts are up to date. You will need up-to-date aged accounts receivable and payable reports, for example. And a list of long-term liabilities will also help you manage the crisis.
3. Update Forecasts
The accounts will tell you what you owe today. But you will also need to understand what is likely to happen in the coming days and weeks. So, update sales and cash flow forecasts to see the complete picture. When facing an acute cash flow crisis, cash flow management will probably become a daily task. So, day-by-day cash forecasts will help you manage the situation.
4. Identify Critical Payments
You cannot, of course, suspend vendor payments indefinitely. You can, however, prioritize payments to ensure business continuation through the crisis. And you can let non-essential vendors wait for a few days or weeks while you get the situation under control.
The priorities are to ensure that sales can still be made and legal action is avoided. However, it is unlikely that a vendor will cut off supplies the moment your account becomes overdue, and legal action takes time to get underway. So, you can sail close to the wind if you are confident that the cash flow situation will improve.
5. Negotiate With Key Vendors
Most vendors will probably be accommodating to a certain degree. But, if you don’t pay people on time, don’t communicate with them or you don’t respond to their emails or take their calls, that’s when the problems can begin. So, talk to suppliers with high-value balances to arrange delayed payments where possible, but be realistic about target payment dates and build in a bit of leeway for yourself. Too many unkept promises will only aggravate the situation.
6. Ramp Up Collections Activity
The steps so far will hopefully have slowed the outflow of cash. The next step is to speed up the incoming money, and the first place to start looking for an immediate boost to cash flow is in the accounts receivable. So, review the aged accounts receivable report and highlight the significant balances. Chase the overdue accounts hard and send reminders to customers that are soon to become due.
7. Consider Other Cash Generation Options
Depending on timing, you may also be able to generate some cash through other means. Do you have any assets that could be sold, for example? Could you offer customers a one-off discount for cash with order sales or prepaid purchases of services? Such measures may cost you money in the short term. However, the funds generated might help you get through the immediate cash flow crisis.
8. Explore Financing Options
Banks have a reputation for taking a long time to make lending decisions. However, obtaining a temporary bank loan or overdraft facility might still be an option. However, you will need forecasts that demonstrate your ability to repay any loan and the long-term viability of the business. You may also be asked to provide collateral or a personal guarantee.
For many businesses, bank loans are not always the best option. And for some companies, they are not an option at all. So, it would be advisable to consider the alternatives. You might be able to alleviate immediate cash flow problems through invoice factoring, which allows you to sell your unpaid invoices for immediate cash.
9. Don’t Lose Your Nerve
A significant cash flow shortage can at first appear to be impossible to overcome. However, if you tackle the problem one step at a time, you can do much to manage a short-term cash flow crisis. But, if you throw in the towel too soon, you might unnecessarily lose your business. So, keep your nerve, and be tough with creditors and debtors. If you need advice, talk to your accountant, who may have other ideas about how to manage the situation.
10. Take Steps to Prevent Further Cash Flow Issues
Finally, once the dust has settled, it would be wise to consider why the situation occurred at all. Do you need to improve your cash flow forecasting, for example? Are your collection procedures sufficiently robust? Or, perhaps you need more working capital in the business to give yourself a buffer against the unexpected? Whatever the cause of the immediate problem, you don’t want to find yourself in the same situation six or twelve months from now.
The Bottom Line
The crucial thing when facing an imminent and critical cash flow crisis is not to panic. Instead, assess the situation, buy yourself some time, then take solving the issue one step at a time, and, of course, take steps to improve your ongoing cash position so that you can avoid or cope better with future cash flow challenges.
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Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay, Universal Funding can help your growing company. Call us at 800.405.6035 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.
About Universal Funding
Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.