Different studies revealed the fact that 82% business fails due to the cash flow crisis.
A cash flow crisis occurs when the amount of money going out of the business is more than the amount of money that comes into the business.
During a cash flow crisis, the business owners don’t have enough money for covering the payroll and for operating expenses which leads to the downfall of the business. Generally, cash flow crisis in business occurs due to the lack of proper planning and proper strategy by the business owners.
You should completely know how to deal with a cash flow crisis in your business in order to save your business from collapsing.
Today in this article we will guide you to survive or deal with the cash flow crisis in your business. Read the article till the end. This will make sure that you survive and deal with the cash flow crisis in a proper way.
Steps To Survive A Cash Flow Crisis
Now let us have a look at the steps to survive a cash flow crisis in order to save your business from collapsing
Improve the Profit Margin by Changing Your Business Plan
When you face a cash flow crisis in your business, first of all, you should have a look and do a quick review of your business plans, operations, processes, and expenses. It will help you to understand why this cash flow crisis occurred and will definitely help you to avoid mistakes in order to prevent any future cash flow crisis in your business.
You should do a complete review of the job costing in your business in order to look at the profit and loss statement and the profit margin of your business based on individual categories.
This will definitely help you to determine which category earns you the most profit and which category causes loss to your business. Thus you can take preventive measures to stop these losses and focus more on the areas which earn the most profit for your business.
For example, if you find that any client is costing you more money than you expected, then you can let go of that client. You have to change the pricing structure of your business. You should avoid unnecessary expenses and should remove them from your business operations.
Speed Up Your Receivables
You can use Tesla to boost cash flow in order to accelerate your receivables. It will help you to accelerate your receivables by accepting pre-orders and offerings for the items and services before their production starts.
When money comes into your business rapidly, the cash flow crisis will be automatically solved.
Now let us have a look at some other strategies that you can use to speed up your receivables
- You should ask your customers for an early deposit or partial payment and should avoid any due payment after the item or product is delivered to the customers.
- You should send the invoices to the customers as early as possible to receive the payment as soon as the product or item is delivered. You must avoid sending all the invoices on a particular day of the month which might cause late payment by the customers.
- You have to review your account receivable in order to find out any due payment of the customers. If you find any due payment of any customer, then you must ask that particular customer for partial payment or to clear the entire due.
- You should use different methods to receive payments from the customers such as credit card, debit card, net banking, mobile and electronic payments etc.
Reduce The Amount of Cash Going Out
In the cash flow crisis period, you should try to negotiate your payables. If you reduce the amount of cash going out of your company in the cash flow crisis period it will definitely boost your working capital.
You have to make an understanding with the vendors for delaying the payment.
Although some of the vendors will not allow you to delay the payments, the vendors whom you have been loyal to will definitely allow you to delay the payments. You might also get a reduced obligation from your utility providers.
Taking Loan from External Sources
The best way to remove the cash flow crisis is to increase the amount of cash coming into your company. You can increase the amount of cash coming into your company by simply taking a loan or credit card advance.
You must be completely aware of the interest rates associated with that loan because if you borrow an excessive amount of money then your business might fall under a huge debt which will cause a lot of problems in your business and it may become the reason for the early demise of your business.
If the cash flow crisis occurs due to intrinsic problems in your business, then you should avoid the borrowing option because it will create a lot of trouble in the near future.
Sell Equity
If you want to increase the working capital of your business without borrowing any money from other external sources, then you can sell a piece of your ownership of your business to another individual and run the business in partnership in order to boost up the working capital of your business.
You must be very much careful while choosing an investor or a partner for your business.
Avoid Unnecessary Expenses
When you face a cash flow crisis in your business, you should always avoid any unnecessary expenses in your business. You should strategize and prioritize the expenses of your business because the best way to remove the cash flow crisis is to decrease the amount of money going out of your business.
Sell Non-Essential Assets
When you face a cash flow crisis in your business, you can also sell or cut off the nonessential assets of your business. The amount of money received after selling those nonessential assets can be very much helpful in order to fix the problem of cash flow crisis in your business.
Best Methods To Increase The Cash Flow In Your Business
Now let us have a look at the best methods you can use to increase the cash flow in your business
- Preparation
When your business faces the problem of a cash flow crisis, you have to optimize your plans and strategies by taking help from the financial reports such as balance sheet, income statement, and cash flow statement. Therefore you must make sure that your business’s financial reports are up to date and you should keep a check on them on a regular basis.
- Precaution
“Prevention or Precaution is better than cure”. This saying also applies in the phase of a cash flow crisis in a business. You should always take preventive measures and precautions in order to avoid the problem of a cash flow crisis in your business.
Some of the preventive measures that you can use are, use management accounting, keep a close look at your business operations, cash flow forecasting, review your business’ performance on a regular basis.
How Management Accounting Helps You To Improve Cash Flow
Management accounting mainly deals with all the financial reports of your business for cash flow forecasting, optimizing the cash flow, and avoiding cash flow crises.
If you focus on the daily sales of your company and optimize the profit margin of your business, then you can definitely avoid the risk of a cash flow crisis in your business.
Management accounting will help you take database decisions to optimize the business operations and thus it will improve the cash flow in your business.
Final Words
We hope that now you completely know how to survive a cash flow crisis in your business and how to improve the cash flow in your business.
The guidance provided in this article will definitely help you to know how to survive a cash flow crisis in your business and how to improve the cash flow in your business.
You should always try to use management accounting and should take preventive measures to optimize your business’ cash flow. We recommend you read the entire article without skipping a single point.