Every business will experience tough times. Small businesses are especially vulnerable because their management resources are usually thin. And they lack the tools to predict difficulties, and identify available remedies.
Majority of the businesses fail due to cash flow problems. A cash flow shortage happens when more money is flowing out of a business than is flowing in to the business. That means, during a cash flow shortage, you might not have enough money cover payroll or other operating expenses.
When business leaders have no strategy or plan in place for handling a cash flow shortage, a cash flow crisis occurs. In the event of a cash flow crisis, you need to be ready to take action to save your business from an untimely demise.
Adjust Your Business Plan to Improve Profit Margins
Encountering a cash flow shortage should lead you to closely inspect your business plan, processes, operations and expenses. You need to determine why you encountered a cash flow shortage, whether it will be a recurring problem and you will also need to put a plan in place to handle future shortages.
Use job costing to look at your business’s profit and loss statements and profit margins based on individual categories within your company (jobs, clients, employees, events, marketing strategies, products and services) to determine which areas of your business are the most and least profitable. This will help you adjust your business plan to focus on services that generate the most profit , let go of clients who might be costing you more money than you realize, optimize your pricing structure and also identify areas of waste or unnecessary expense to remove from your operations
Lease, Don’t Buy
Since leasing supplies, equipment, and real estate usually ends up being more expensive than buying, doing so may seem counterintuitive to someone who is only paying attention to the bottom line, or your income after expenses are paid off. But unless your company is flush with cash, you’re going to want to maintain a cash stream for day-to-day operations.
By leasing, you pay in small increments, which helps improve cash flow. An added bonus is that lease payments are a business expense, and thereby can be written off on your taxes.
Use Electronic Payments
If you pay electronically, you can wait until the morning of the day a bill is due to make payment. This buying of time improves your cash flow. You can also use a business credit card as some offer a grace period as long as 21 days, which can do a lot to increase your cash flow. You might even get cash back. But don’t pile up too much debt
Lend your company money
This may be a preferable option compared to applying for a commercial loan from your bank.
Money that you loan your company if you are a director of a limited company gets recorded in the Director’s loan account (DLA).
You can also pay some of your operational and other expenses and charge it to DLA. Any money you spend personally on behalf of the company (business expense) is recorded as due to you in the Director’s loan account. This is also a way of injecting money to the company, thus improving your cash flow.
And when the cash flow of the company improves, don’t forget to pay yourself as one of the creditors of the company.
Improve Your Inventory
Take an inventory check. Make a list of those goods you buy that aren’t moving at the same pace as your other products. They tie up a lot of cash and could hurt your cash flow.
Instead of buying more of what doesn’t sell, get rid of it—even if you need to sell it at a discount. It’s hard to walk away from products you fall in love with, hoping that someday you’ll magically see heightened demand, but that almost never happens. Be objective, not emotional.
Cut Your Pay and That of Highly Paid Employees
Payroll is the biggest expense for many small businesses. In bad economic times, when jobs are scarce, it’s usually possible to cut pay by a small percentage and not lose employees. If you are an employee of the company, the first person to take a pay cut should be you . Even if your compensation is already modest, so that cutting it won’t save much, trimming your own salary is sure to get employees’ attention—and their respect. Next, sit down with any well-paid employees to help them confront the need to voluntarily accept similar reductions. Depending on pay levels, the economy, and other circumstances, a cut of 5% to 20% may be acceptable. But be reluctant to cut the pay of people at the bottom of your scale.
This cut-from-the-top approach usually makes sense. First, it should help you save money without losing essential employees. Second, and perhaps more important, it sends a message to everyone connected to your company that you and other managers take personal responsibility for coping with tough times.
Review all costs.
Determine which costs might be eliminated, reduced or renegotiated.
Re-evaluate your business operations.
Continually review your cost structure to find efficiency gaps and implementations that can be modified to increase savings. Identify parts of the operation that can be outsourced to freelancers and third-party providers.
Certain areas of business operations can be re-evaluated and updated for efficiency, these include shipping costs, marketing returns, overdue invoices, rented equipment payments, stocking up on materials when tariffs are low and potentially asking vendors for a break. As the economy changes, your business strategies will, too. It is important to always look for ways to improve your product and invest in smarter solutions.
Prepare a cash flow forecast.
If don’t already have a cash flow forecast, now is the time to start. Begin with a simple 13-week projection containing your major cash inflows and outflows each week. This will allow you to understand periods of cash difficulty and provide you with time to maneuver.
Healthy cash flow is the result of operations that run efficiently and smoothly. While implementing some or all of the above ten steps should help you increase your business’s cash flow, you’ll also want to make sure you’re making the right decisions regarding your marketing, customer service, product or service development, and new customer acquisition. That’s why it’s critical to review and update your business plan on a regular basis to ensure you anticipate trends and challenges before they impact your profitability
If, after making any or all of these adjustments, you find you have made a loss this year, see our blog on your options dealing with a Corporation Tax Loss
If you find this topic helpful and want to know more, please give us a call on +44 07828 580251.
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