What is a Cash Flow Crisis and What Can You Do to Avoid One?

Poor cash flow is singlehandedly responsible for the deaths of most small businesses. It doesn’t matter how amazing your ideas are, if you don’t have enough money coming in, you won’t be able to settle your debts. All businesses go through difficult periods. From slow paying customers to bigger economic woes, this is all part and parcel of running a business. Managing cash flow is a huge challenge for any business owner, but with the right procedures in place, your business will survive the inevitable hiccups that arise.

Cash is the lifeblood of any business. Cash comes in from customers/clients and goes out to pay the bills, wages, and buy stock. A cash flow crisis is when you don’t have enough money coming in to cover your expenses. In the short term, it is manageable, as you can take out a loan from Lending Express, but if the situation continues, it won’t be long before you struggle to pay your creditors and running expenses.

There are several steps you can take to avoid a cash flow crisis.

Financial Management

All business owners need to stay on top of their finances. You don’t need an MBA, but you still need to understand the fundamentals of bookkeeping. Take an accounting course and familiarize yourself with Profit and Loss accounts, balance sheets, and double-entry bookkeeping. And if you don’t have the time or the inclination, make sure you employ someone with a good head for figures.

Use your financial expertise to run regular cash flow forecasts. This will give you a good idea of how the money flows in and out of the business. There may be periods when business is slow, in which case you can plan ahead to avoid any problems. Get into the habit of reviewing your accounts as often as possible. Just because business is booming, it doesn’t mean the books are healthy.

Thanks to a range of online accounting packages, it is incredibly easy for SMEs to manage their finances. You can review your accounts on the go, from any internet-enabled device. This helps you to stay up to date at all times.

Credit Control

Don’t wait to invoice clients for work completed. As soon as you finish a job, send out an invoice with clear payment terms. A 30-day payment term is standard in most businesses, but if this is a new client, be wary of offering them credit.  If this is a large project or an expensive one, consider negotiating staged payments so you are not out of pocket for too long. This will help your cash flow.

Make it nice and easy for clients/customers to pay you. The more options you give them, the faster the money will arrive in your bank account. Online payments are preferred these days but be flexible.

Build a Savings Buffer

Savings are there to help you weather any tricky periods. Always maintain a savings account. Dipping into savings is much cheaper than using an unauthorized overdraft to pay the bills when a large client is late paying their invoice.

Never make the mistake of focusing on profits. Cash flow is far more important – without a healthy cash flow, your business won’t survive.

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