How to deal with cash flow problems – a quick guide

Dealing with cash flow problems

Below are some suggestions for unlocking funds without affecting your operational capacity. Keep in mind that you should always seek professional guidance before making changes to your business if you are unsure of the repercussions or potential issues.

Hidden sources of finance

Most business owners immediately think of the bank or loans when they’re short of money. But there are many more resources you can tap before you ask for that expensive overdraft or for an overdraft extension. You can often free up funds from within your business by re-examining your business systems, and these funds might in themselves be sufficient for your immediate needs.

To free up funds from within your business, you could look closely at the following.

Assets

Your assets include debtors, stock, pre-paid expenses, vehicles, plant and equipment, fittings and property. Each of these is a possible source of funds.

Debtors

Are you letting some customers have the free use of your money for months?

Here’s how you fix the problem.

• Get invoices out promptly.
• Send the invoice with the goods, and date the invoice from the day the service was completed rather than following the standard ‘last day of the month’ date for invoices.
• Consider changing the terms for some of your customers, or for new customers.
• Follow up promptly when invoices aren’t paid by the due date.
• Establish the average age of your Accounts Receivable and set yourself the goal of reducing this age by a set target every month. It’s amazing the impact this will have on your cashflow, even collecting one day quicker.
• Consider offering a discount for prompt payment.

Stock

Do you have excessive capital tied up in stock? This can occur in two ways:

• Carrying high levels of items that you could obtain from suppliers at short notice.
• Having too many slow-moving items (and too few fast-moving items).

You need to regularly review your stock levels, your stock turnover rates and your purchasing policies. Can you free up money by reducing stock? What about moving out of the slow-moving lines or having a quick sale of the slow-moving stock? It might pay you to reduce some items quite heavily to get some money in quickly.

Pre-paid expenses

These pre-paid expenses often relate to services. For example, you might have always paid your insurance bill for the year all in one hit, but could you instead arrange to pay small monthly amounts?

Fixed assets

Fixed assets can often be the source of a significant amount of cash. Are your assets fully utilised? You might be able to sell off little-used assets and hire suitable replacements when you require them.

Suppliers

Finally, consider your suppliers as a possible source of funds. Ask for extended payment terms for a short period to give you the opportunity to sell the goods first before you have to pay. If the supplier won’t budge, try splitting the order in two and offer to pay normal credit terms (30 days) on one half of the order and 90 days on the other half. Your suppliers will be more likely to agree to this kind of arrangement if you’ve paid them promptly in the past.

Your customers

Don’t forget that your customers can be a source of business funds. In addition to the good debt collection tactics already discussed, consider the following:

• Ask some of your credit customers if they would be willing to use their bank credit cards for purchases from you, instead of using the account facility they have with you. They will more than likely have a credit card that offers 55 days interest free terms.
• If you’re starting a new business, consider establishing it on a cash-only basis to keep the funds inside your business rather than locked up in Accounts Receivable.
• If you supply goods over a period of time or if you’re a service business, ask if you can invoice for progress payments.

Next steps

• Identify exactly how much additional cash you’ll need – this is especially important if you decide you need additional finance from a lender.
• Seek professional help from an accountant, business mentor, or your bank manager.
• Reduce your expenses and tighten your credit policies based on the steps above.
• Research additional options for increasing your cash position, from low-interest bank loans and overdraft facilities, to equity assistance.