Tips on how to survive a Cash Flow squeeze

Tips on how to survive a Cash Flow squeeze

Tips on how to survive a Cash Flow squeeze

 

During the unpredictable economic climate the following tips can be implemented to help protect your business from the pressures of a Cash Flow squeeze:

  1. Do a Cash Flow Budget: a Cashflow budget helps you understand the true cash requirements of running your business, it includes not only the operating costs of your business but also funding and other capital requirements such as GST and Tax obligations of the Australian Tax office. These cash requirements are often overlooked when the business owner’s sole focus is on the Profit & Loss statement. By becoming familiar with your business’s balance sheet critical information such as cash and liquidity can be determined. By solely focusing on the profit and loss statement you gain an understanding on the margins of your sales however you miss focusing on where the profit of your business is truly going. The mistake often made by business owners is that the profit should flow directly into their bank account, however by understanding the balance sheet the true cash cost of operating the business can be determined and this gives the owner focus on what sales figures they require and what profit margins are needed to truly fund the business and return a true cash profit to the owner.
  2. Establish Credit terms wisely: the need to extend credit to customers is a fact of life for most businesses; however it is critical to set clear terms of payment. By carrying a large outstanding debtor balance the cost of this finance is high when your creditor payment terms are half or even more than your debtor terms. The effect long term debtor payments have on your cash flow is huge and can literally cripple a business if not kept under control.
  3. Keep on Marketing: in tough economic times, businesses look at ways of reducing their expenses and often the marketing budget is the first one to be reduced. As competition increases with the tough economic times the need for marketing activities is imperative to ensure you maintain your market share through constant exposure to your customers.
  4. Manage Debtors: make sure that your business has a clear policy for approving credit and collecting debts and that your customers are aware of it. Most importantly, enforce it, pursue your outstanding debts with letters, phone calls and emails, be fair but firm.
  5. Invoice Promptly: Ensure invoices are sent out in a timely and accurate manner. Invoice as soon as the service is completed or the good is supplied; if the invoice is delayed the customer will have a reduced propensity to pay as the nexus of receipt of the service/good has been lost.
  6. Monitor Cash Flow: by having an accurate cash flow budget that highlights periods when cash may be tight enables you to plan for this time effectively. Also avoid funding major purchases from your business’ working capital unless you have determined that you definitely have the cash to cover it.
  7. Use finance products wisely: short term debt products can be useful to overcome short periods of cash flow pressure, but ensure they don’t just become a convenient way of financing expenses as their cost is high. If you are going to use them ensure you have a clear strategy for their use and repayment. A business credit card that is repaid in full each month can be a good way of managing short term cash flow squeezes.
  8. Maintain client relationships: it’s difficult for businesses to attract new clients during an economic downturn. Therefore it is important to keep your client base in order to stay afloat. Provide your clients with incentives such as loyalty programs to maintain regular contact. Measures such as these will ensure that your business survives during the tough times and prosper in a buoyant economy.
  9. Think twice before lowering the price: in order to stimulate your business during difficult times, it may be tempting to lower prices. If you are going to lower prices ensure that you are not lowering them at the detriment of your own business, if the price is to low you will go out the back door quickly. It may be better to build an alternative strategy to increase sales such as a “buy two and receive a free gift” promotion. It is important to make sure that the true cost of your product and the cost of the promotion are determined to ensure that you are still making the margins you require to remain in business.
  10. Keep your valuable employees: it costs far more to hire and train a new employee than it does to ensure your valuable employees are happy in their job. By ensuring that you implement training and other strategies to retain your key staff, the benefits will far out way the cost. Their strengths will help carry the business through the tough times and prosper in the good times.
  11. Think long term: whilst you may be focusing on immediate cash flow issues that are impacting your business, don’t lose sight of the big picture. Apart from helping you to avoid decisions that might be beneficial in the short term, but detrimental in the long run, long term planning will help keep you mentally prepared to overcome some of the obstacles that you may face.
  12. Don’t panic and get advice: most importantly, despite the recent downturn, the change is part of an economic cycle. Things will improve and the most important action is to remain focused to ensure that your business is poised to take advantage of the upturn when it takes place. If in the short term things don’t go to plan and your business is at risk, seek advice without delay.