Cash flow is the total amount of capital moving in and out of your company. It’s also one of the key indicators of financial health that has the ability to make or break a startup.
That’s why a cash flow crisis is such a major issue for businesses. And if you find yourself in one, you will need to take immediate action to get out of that situation.
To prevent a cash flow crisis, here are seven tips that will ensure a stable stream of income and a positive balance.
1. Accurately Forecast Cash Flow
The first step in preventing a crisis is anticipation. Creating an accurate cash flow forecast helps you stay ahead of all expected finances and the time it takes to create and receive them.
For startups who have successfully navigated through their first year of business, this can be as easy as creating projections based on the previous year. Otherwise, it comes down to creating a forecast with conservative estimates with low-to-moderate leeway and avoiding factors that foil forecast accuracy.
In both cases, be sure to include the cost of production and fixed expenses, and set aside a liberal figure for variable costs. By doing this, you reduce risk and gain an accurate forecast with a low chance of a negative cash flow.
2. Reduce Non-Essentials
When startups have a fixed operational budget, there is no margin for excessive spending. Cutting down expenses that don’t make a profit, or stopping investments that don’t create returns relieves pressure from your company’s cash flow.
A landline is useless if all your customers and business partners call you on your cell. Similarly, a new designer might be unwarranted if the current design team can easily manage the entire workload.
Although it doesn’t save too much money, it does help your efforts of staying ahead of expenses and creating a profitable business.
3. Rollback Bills
There is a small chance that you’ll be able to hold off fixed overhead expenses like utilities or paychecks. What you can do is come to an agreement with suppliers and get an extension on your payments.
Delaying payments reduces tension off of your cash flow balance at the end of the month, and it mainly comes down to how good of a relationship you have with the suppliers. If it becomes a recurring issue, try to negotiate a later due date and get your suppliers to accept it as a permanent change.
4. Get Temporary Financing
A major problem for small businesses is getting paid by clients on time. When a customer is late on their payment, it automatically means cash flow comes to a halt. You are left with no other option but to pursue temporary financing to keep your business running.
Short-term bridge loans like fast low-interest caveat loans are your best option in these kinds of situations. Caveat loans allow you to get financing by putting some of your fixed assets as collateral, like a quick mortgage on your business.
Although most bridge loans have a high-interest rate (12-15%), they are extremely useful when you want to cover business expenses and maintain positive cash flow until you receive payment from clients.
5. Create Client Incentives
To eliminate the issue of late payments by clients, motivate them with discount offers if they complete their invoice payments before the due date. Although this costs you some money, ultimately it will stabilize your stream of income.
On the other hand, you can create negative incentives and charge clients extra if they fall behind on their payments. This ensures clients don’t miss payments, especially with clients who have a history of being late whom you can afford to lose if it comes to that.
6. Consider Increasing Price Points
If you’re having cash flow problems, increasing the price of your products and services is one of the ways to boost your finances. However, this almost always comes as a shock to clients, so you will need to plan your price change.
The most important rule is to keep it below or at the same level as competitors to ensure clients don’t go to them. Additionally, give notice to your clients before making the change so everyone is aware and remains on the same page.
7. Implement Advice
Negative cash flow has a serious impact on the financial viability of your business. Be strategic and implement these tactics according to your business.
Once you manage to pull out of a cash flow crisis, it’s important to create a plan and stick with it. Only this will ensure you don’t find yourself in a similar financial position ever again.