Dealing with a sudden cash flow crisis, even if you’re working hard to avoid shortfalls, is hugely distracting. A formerly reliable customer might take much longer to pay than anticipated or a large consignment might fail to show up, leaving you out of pocket. If you’re starting a business, it could simply be taking longer than expected to turn a profit.

Red light warnings

Develop red light systems to warn you automatically if something needs querying:

• Check as early as possible if leads, orders, or sales, fall below a certain threshold, or if planned sales are delayed or a substantial customer stops buying from you.
• Key indicators such as profit margins, liquidity ratios and stock ratios deteriorate beyond an agreed limit. Make sure you have regular feeds of how your business is performing.
• You also need to know about any substantial invoices that are in dispute, particularly late debts and customers exceeding their credit limits.

Building productive relationships with your key suppliers is important, so they are prepared to extend extra credit to you when you need it.

If you have accounting software then it should be relatively easy to view your red flags weekly, monthly (or any period you set).

Identify the causes and take action

Below are some common causes and possible solutions of a cash crisis you may need to solve:

• A major customer hasn’t paid on time. Implement stricter credit control and better debt collection procedures. Contact them to ensure you have the right purchase order and the invoice has been sent to the right person. Even check if your contact has gone on holiday and forgotten to pass on your invoice.
• A rise in the cost of production has eroded your profit margin. Try and source less expensive materials or supplies or decide if you need to raise your price. Monitor your gross profit margin for any further profit slippage.
• Your business overheads have blown out. Identify specific expenses that have increased and see how you can reduce them. Regularly monitoring your net profit margins to spot any out-of-proportion increases so you can take timely action.
• Your business is growing faster than your capacity to fund the growth (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 to avoid failure through overtrading or raise the necessary working capital to get you over the temporary cash shortage.
• Sales have been slower than predicted. Review your marketing plan and sales campaigns. Alternatively, if you can’t see any future improvement in immediate sales, consider other markets and targets.

There may be other causes such as the failure of a major contract or you bought 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 a repeat, such as diversifying your customer base or using your cash flow statements and forecasts to time purchases more appropriately.

Sourcing finance

If you do find yourself in a cash crisis (it’s a temporary hitch and the business is still sound), there are a number of funding options to consider, ranging from self-financing or 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.

Internal funds

Before you look for external sources of funding however can you free up cash from within your business? For example:

• Offer customers a discount for early payment or ask them to pay immediately.
• Offer for customers to pay by credit card when usually you don’t.
• Hold a sale of surplus or slow-moving stock to raise cash quickly.
• Ask suppliers to take back excess stock and a credit or give you longer credit terms.
• Sell underused assets and rent the equipment instead, as and when required.
• Downgrade or sell vehicles and lease instead.
• Reduce your drawings from the business until revenues improve.
• Your accountant and advisers may be able to suggest other ways to release the locked-up cash in your business.

Bank loans

If you need a business loan and have a good banking track record, it could be little more than a formality to get a higher overdraft facility or access to a business loan to tide you over. If you’re going to need quite a lot more money, you’ll likely have to present a more detailed business plan and financial forecasts.

Invoice finance

If you have cash tied up in unpaid invoicing, you might qualify for invoice finance. This facility enables you with immediate access up to 80 per cent of the value of any unpaid invoices that your business might have. It helps free cash flow by releasing money from unpaid invoices as and when you need it.

Partners and investors

If your business can’t afford to service loan repayments out of surplus cash flow, then it may need more capital so you could consider taking on a business partner to invest in your business. There are advantages but also pitfalls to avoid. Get expert advice first from your accountant and your lawyer – they may know of suitable investors. Be aware that you’ll need to share the ownership of your business if you go down this path.

Family and friends

You could ask family, friends or business colleagues to help out with a temporary or longer-term loan. It’s best to put the agreement in writing and get everyone to sign it, so that both sides are clear on what has been agreed. Be aware that this sort of agreement could strain personal or working relationships if things go wrong, so treat it as a last option.

Summary

Managing cash in a crisis is stressful for any business owner, but you do have options starting with preventative measures such as cash flow statements and forecasts and sourcing finance.

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