Avoid running out of money and manage your cash flow in a crisis

If you’re struggling to find customers due to an unexpected crisis, the need to avoid running out of money is critical to keep the business operating and buy time to recover. Here are some ways to survive a crisis and potentially create a stronger business in the process.

Build short-term cash reserves
If you don’t have strong cash savings, you may be able to free up cash within your business. You may have machinery or vehicles you no longer need that could be sold and turned into cash and leased back when you need them. Other ways to raise extra working capital include:

• liquidating excess inventory or raw materials
• re-investing your own capital
• as a last resort, finding external investors or selling parts of the business

Refinancing against your existing assets could be an option, as well, though that can be challenging if you’re facing cash flow issues. Regardless, look closely at the business assets on your balance sheet to see what you can convert into cash without making an impact on your core business.

Build resilience
Now may be the time to make permanent changes to strengthen your business. These are often things you’ve thought of doing but haven’t had the time or didn’t need to do when sales were steady. Take time to document your business processes to find ways you can improve capacity by doing more with less. Other ways to be more resilient include:

• having more than a few customers or segments to rely on
• diversifying into new growth markets (some businesses thrive in times of crisis)
• widening your product or service mix
• negotiating new terms with suppliers
• amending your terms of service to collect money faster
• cutting any part of your business that doesn’t make a profit
• scaling back non-essential staff
• focusing on core business

Decide what changes could make your business leaner and meaner. You’ll probably know instinctively what needs to go and what needs to stay.

Maintain your margins
A reduction in gross profit is a key warning sign that hints at a deteriorating cash situation. Monitor what could negatively affect your margins such as:

• increases in raw materials or product costs
• reduction in profitable sales
• price discounting by staff
• waste during production
• a loss of quality that decreases customer returns
• late paying customers

Select two or three key warning signals that matter to your business and set up regular monitoring to remedy any decline.

Tighten credit control
Efficient credit control systems help speed up your cash collection and reduce bad debt by limiting how much credit you provide to customers. Consider collection options such as:

• requesting deposits or progress payments
• using credit scoring systems and setting appropriate credit limits
• credit checking all customers
• monitoring late payments
• setting up a process to follow up with debtors
• charging interest on late payments
• as a last resort, using a debt collection agency or specialist lawyer

Identify future cash flow
Sketch out cash flow scenarios to identify what your business would look like in the future if sales drop (or cease) over a period of time. Develop contingencies in advance such as:

• costs you will no longer have
• extra cuts you can make
• the impact on gross profit and margin
• the revenue you need to break even
• the length of time it takes to recover
• tighter controls over inventory to service customers just in time

Each drop in sales will usually have a corresponding fall in variable costs (materials, cost of goods sold), but at some stage you may find it’s uneconomic to continue with certain products and services if the fixed costs are too high. In these cases, you may have to lower your overall cost base, possibly making staff reductions, moving locations or closing less profitable product lines.

Protect your supply chain
Yours won’t be the only business affected by a crisis. Outline what may happen to your key suppliers and identify risks to your business if they were suddenly no longer able to deliver. This is especially critical if you have exclusive or hard to replace materials or products as part of your own delivery to customers.

Develop an alternate supplier plan and consider reaching out to these businesses as back-up if your existing supplier can’t deliver.

Plan for the future
You may be able to pivot your business to find new revenue streams by targeting different customers or markets, developing new products or services or finding new ways to sell to your customers. Outline what you aim to implement to bring your business back to positive cash flow and then profitability.

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