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5 ways to survive a cashflow crisis

By Pauline Muindi | September 1st 2021
Upset businessman [Courtesy]

Despite careful planning and good intentions, there are times when a small business can find itself in a cash crunch. Often overlooked, cash flow is a crucial element in ensuring the smooth and successful running of any business.

Simply put, cash flow is the money that flows in and out of your business – from profits coming in to expenses going out. Cash flow shortage happens when the incoming money is insufficient to meet the expenses of your business. This can happen when your business capital is all tied up in stagnant inventory, expensive equipment, or dismal debt collection.

When you suffer a cashflow shortage, you are likely to have problems meeting your day-to-day expenses in business. For example, you may be unable to pay loans deposits and bills in time, which will result in expensive penalties. You may also lack enough cash to pay staff and suppliers or fulfil customer orders.

Poor cash flow threatens the very existence of your business. In many cases, entrepreneurs find themselves injecting additional cash from their own pockets to finance their business’ operational costs and settle business debts.

Obviously, using your personal savings to bail out your business isn’t a sustainable strategy. Here are a few effective strategies to use to manage and survive a cash flow crisis:

Limit your inventory

Having too much inventory is one of the leading causes of cashflow shortages. Idle inventory is much like arteriosclerosis, a disease that blocks the arteries. The excess inventory blocks smooth flow of money in and out of your business, which can lead to premature death for your business venture.

To prevent this scenario, keep a close eye on your inventory. Use your daily sales activity as a guide on how much inventory you should have any given time. Set up an inventory management system to ensure you never have too little or excess inventory.

In a crisis, come up with creative ideas to sell the excess inventory in your warehouse. For example, you can bundle items and sell them at a slightly lower price than if you sold them separately. Also try selling the excess inventory at discounted prices or even offering some of them as freebie incentives to draw customers to your faster-moving products.

Cut your salary

Do you pay yourself as a business owner each month? Many business experts recommend adding yourself to the payroll and drawing a monthly salary from your business. One survey found that many business owners limit their salaries to 50 percent of profits.

However, if your business is always running into cash flow shortages, consider giving yourself a pay cut. For instance, if you were drawing 50 percent of profits, cut it down to 10 or 20 percent. Besides stabilising your business cash flow in a crisis, this move will also motivate you to look for long-term solution.

Also consider cutting staff salaries – especially those who are highly paid. If it comes to this, discuss with your staff why the move is necessary and when they may expect their full salaries to re restored. You may also have to lay off any staff that your business can do without.

Improve invoice management

Does your business send out invoices to customers? How long does it take for customers to make payments? Delay in getting payments from customers may explain why you are experiencing cash flow shortages in your business.

Thing of creative ways you can get your customers to pay you sooner rather than later. For example, you can offer a discount for early payments, which serves as an incentive for customers to pay as quickly as possible. Send out invoices promptly and make sure that customers understand the due dates, and any penalties for late payments.

If you haven’t done so already, upgrade your invoicing system to a more efficient one. For instance, instead of manually processing invoices, adopt software to automate the process. While at it, offer various payment options for your customers such as credit card, Mpesa, PayPal and so on.

Add new income streams

One of the best solutions to a cash flow crisis is by expanding your income streams. Think of ways you can add a few new streams of income to your business without having to invest too much additional revenue. For instance, if you have been selling locally, set up an online store and start selling nationally or even globally.

In addition, think about offering a new service. For instance, if you have a barber shop, you can start offering manicures and pedicures. Also think of creating a video or online course to sell.

You can also pursue an income stream that is not directly related to your core business. For example, if you run a small restaurant business, you can still pursue an additional income stream from a wholesale business.

Tighten credit to customers

Be more cautious when extending credit to your customers. Bad debts can easily lead to cash flow issues and eventually kill your business. Run a credit check on new customers and consider requesting for references.

To avoid bad debts, it is also advisable to set realistic credit limits. You can always increase the credit limit when a new customer demonstrates reliability and trustworthiness. It is important to state your terms and conditions clearly and include them in all relevant documents.

Remind customers when payments are due. If customers don’t pay in time, follow up with phone calls to a specified contact. This gives the customer a chance to explain why they have delayed the payment and when you can expect to get paid. Remind them of any late payment penalties and discuss a tenable solution.

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