No matter how good the business is running, some business owners may experience sudden cash flow shortfall because of unexpected and uncontrolled situations. Even with your best efforts, issues concerning cash flows can arise. Solving a deficit in cash flow can be really stressful, and may take more of your time. This is why learning effective ways to get out of a cash flow crisis is really necessary if you want your small business to succeed.
When it comes to managing cash flow, the most important thing you should consider is forecast. Cash flow forecast can make a big difference for your business. With the right forecast, you can better prepare and predict possible problems so you can manage your cash flow more effectively. However, you should always use realistic forecasts, especially worst case forecast, so you can accurately know your financial situation in the future. This way, if you need financial assistance from an institution like the bank, they’ll see that you are really prepared and actively handling your cash flow.
Identifying the Cause
You may also identify the cause of the crisis through your cash flow forecast. Identifying the cause of the crisis is
very crucial since banks and lenders usually ask about the cause of the problem before considering hel
ping you. Cash flow crisis can be caused by various events such as:
- One of your major customers failed to pay on time.
- Increase in production cost which significantly reduced your profit margin.
- Expenditures have increased.
- The business is growing but you lack fund to support the growth.
- Decrease in sales.
- Global recession and economic crisis.
Once you identify the cause of your cash flow deficit, it is vital that you take actions immediately by getting solutions that will target the main cause of the problem. Understand the main cause, why it occurred, and what actions you need to take to solve it, and more importantly, what actions you need to take to prevent it from happening again.
Freeing Internal Funds
To solve a shortfall in your cash flow, one of the most recommended solutions by business experts is to free up cash from your business funds. Borrowing money may be a good solution but it should be your last resort, especially if you are not sure if you can really handle additional debt to your business. Using some internal funds may be enough to solve the problem. Some of the most common ways to free up internal business funds is to hold a sale for surplus products or slow-moving stocks so you can raise cash more quickly. You can also encourage customers to pay early by offering discounts or rebates for early payment.
If freeing up some internal cash is not enough to solve your cash flow crisis, then it may be time to consider getting funds from external sources. However, before you borrow money, make sure that you are ready to take on more business debt and that borrowing funds will be for the best interest of your business or else, it will be the downfall of your business. Make sure to get advice from reliable people first or consult an accountant on better ways to solve your situation, or if there are still other business solutions you can use before you resort to borrowing money.
There are a lot of sources for external funds. Before you borrow money from lenders or banks, you can consider self-financing, which means you use your personal savings to pay for the deficit. Although this is the easiest source, understand that you will be putting more personal funds on your business, which may not be very good for you in the long-run.
If self-financing is not possible, you can consider getting loan from a bank or getting a partner to invest on the business. However, with a business partner, this could mean that you will no longer own the business solely.