Facing a Cash Crunch

Facing a Cash Crunch?

Cash Crunch Survival: 3 Key Steps

Most small businesses experience a cash crunch at some point. A cash crunch can put the future of a business in jeopardy if not handled correctly. The old adage “cash is king” resonates with all business owners and perhaps most strongly with those whose cash is locked up in receivables. Forecasting cash flow can be difficult and unexpected financial surprises pop up too. In a previous post, we outlined common causes of a cash crunch. Regardless of the cause, business owners experiencing a cash flow shortage should take the following steps to help their business get through it:

1) Acknowledge the Issue

As a business owner, you’re focused on running the business and are pulled in many directions in addition to finance decisions. As soon as you realize you may be facing a cash flow shortfall, personally and closely monitor your business’s financials. This should be your primary area of focus.

Run an accounts receivable aging report (or meet with a bookkeeper or accountant if you’re not sure how to) to understand how long your invoices are outstanding. In other words, how long are you customers taking to pay you? What can you do to increase your collections efforts to get slow paying customers to pay sooner? Make some calls and get time commitments for payments.

Take a close look at your accounts payable to see where you may find some flexibility. Tighten spending and only pay what is absolutely necessary. If you have business credit terms, keep open lines of communication with vendors and see if you can have fees waived or negotiate longer terms.

2) Financing to Fit

In a perfect scenario, you’d have a cash emergency plan in place such as a rainy day fund or reserves. However, a cash flow crunch can sneak up on you and you may not have a financing plan in place.

Start with your banker. While traditional bank lending options such as a line of credit are one option, your banker can also point you in the right direction if other financial products might be a better fit. Even if your bank has turned you down, a banker remains a good starting point for knowledgeable and trustworthy advice. Your bank has a vested interest in helping your business succeed, so your banker can be a solid resource for providing a referral to a trusted secondary lending partner.

If you choose to go out on your own to evaluate lenders, be cautious when considering independent financing companies and online lenders. These lenders are not regulated and don’t provide the same safety and stability as working with a FDIC insured and regulated partner. Transparency can also be a challenge when comparing pricing structure and rates, as many cost components are buried and are incurred later as hidden fees. Make sure you thoroughly research your lending partner, they have expertise in your industry and they provide flexible borrowing options as your circumstances change.

3) Make Changes

Understanding how you got into a cash crunch can help prevent it from happening again and improve your long term viability. This previous post goes into more detail about five common causes of a cash flow crunch. Additionally, a few points to consider:

  • Take a look at your pricing structure. Do you have enough profit built in?
  • Does seasonality affect your business? If so, are there additional products or services you can offer during slow times?
  • Evaluate your customer base and identify the high value customers who consistently pay quickly. You may want to seek out new customers with similar characteristics.

While a cash crunch causes a great deal of stress for any business owner, this temporary liquidity challenge can be overcome. Don’t panic and follow the three steps above to get through both the immediate and long-term concerns of a cash crunch.

We help businesses facing cash flow crunches every day. The Southern Bank’s altLINE platform specializes in providing flexible working capital in circumstances where traditional lines may not be a fit. For more information, contact us today.