A cash crunch is one of the many headaches of running a small business because temporary cash flow problems could make it hard to pay the bills and make it difficult to take advantage of opportunities in the market.
Yet, small businesses always seem to end up in a position where they have less than enough money to cover expenses. In fact, unexpected events could cause an erstwhile solid business to end up dealing with a cash crunch.
Below are five practical tips to minimize the odds that a cash crunch will cripple your business.
Understand your business cycles
Most businesses go through cycles of feast (when revenue streams are flowing smoothly) and famine (when revenue sorts of dries off) and you start to spend your reserves or borrow money. The feast and famine cycles could also relate to seasonal changes in the business dynamics reducing/increasing business expenses, as the case the case may be. Understanding your business cycles will let you anticipate when your revenue is likely to slow down or dry off so that you can take proactive steps to save up more money or cut costs in advance.
Commit to regular review of expenses
You’ll always find yourself under pressure if you have to deal with a mounting pile of unpaid business expenses. You should review your expenses regularly to ensure that you are not paying for things that your business no longer needs. Newspaper/magazine subscriptions, rarely-used gym memberships fees, membership fees and dues to some associations are some of the expenses you may want to review and reduce.
Nonetheless, you should think twice about cutting the expenses that goes into marketing your business or closing your sales. In addition, it won’t be nice to cut the expense that go into your client care because you’ll end up losing more money in the long run.
Don’t take on more than necessary debt
Businesses sometimes need to borrow money to cover some expenses when they are running low on cash. If your business finances are in good standing and the economy is looking up, you’ll find it very easy to borrow money and you might be tempted to borrow more money than you really need. The problem with borrowing money however is that you’ll be required to pay back the money, with interest, and within a given time. Hence, borrowing more money than you need will increase your monthly repayments and interest payable, thereby putting more strain on your finances and causing you to be under pressure to cover expenses each month.
Make it easier for customers to pay you
Another important solution for reducing the likelihood of a crash crunch is to make it easier for clients and customers to pay for your services and good. Sometimes, your business might suffer a cash crunch because customers are finding it hard or inconvenient to get their payments across to you. For instance, payments sent via check or ACH payments will typically take a couple of days (or weeks) to process; hence, you could run out of cash even though you have money coming in the pipeline.
Adopting new payment methods such as credit cards, digital payments, or cryptocurrency could make it easier for you to get paid instead of waiting for weeks for a check to arrive. You can talk to credit card processors in order to gain insights into the payment solution that is best-suited to your needs.
Avoid tying money down unnecessarily as inventory
Businesses often have money tied down in inventory—raw materials, finished products, unsold products on shelves. You can free up some money by your reducing your stock of raw materials or selling finished products at a discount. However, when selling your products at a discount, you should make sure that your buyers understand that you are holding a special sale so that they don’t come to expect the reduced prices as the standard.
Apart from your inventory, you may also want to double check to be sure that you are not tying money down in needless assets. If you have assets such as fixtures, furnishings, and equipment that you don’t usually use, you may want to consider selling such assets.