Often running short of cash isn’t a consideration until it happens. But if you ask someone who’s experienced the anxiety that comes with running low on cash within a dynamic and constantly changing business, it tends to be something that happens once before you decide not to let it happen again. There are certain, simple measures you can put in place which are:
- Identify essential vs non essential expenses
- Make sure you know the timing of incoming and outgoing payments.
- Prioritise important outgoing payments
- Secure access to a short-term credit facility
- Shore up incoming payments
- Implement a robust cash management process / financial control
- Guard against unexpected expenses, delayed customer payments, unexpected revenue downturn by putting a cash buffer in place and protect it
- Don’t count unsigned contracts
- Diversify your revenue
Short term cash constraints can limit a company’s ability to make necessary investments, pay bills, and meet other financial obligations. It can damage the trust in a business from within and without and can sometimes lead to a business’s downfall. Fortunately, there are several strategies that businesses can use to alleviate these issues and improve their financial resiliency.
Identify essential vs non essential expenses
There will be products and services that make sense to consume when in growth mode but can be shut off when cash is tight. Know what these are so that you can flip them off to lean up when cash is tight. Having a grasp on what these are over time will allow you to quickly adapt and flip in and out of tight vs growth modes.
Make sure you know the timing of incoming and outgoing payments
This isn’t just a “they pay on the 12th” type of understanding, this means understanding in detail what the sequence of events and events and timings should be. Even if you’re sufficiently cash positive, businesses can get out with specific timing where they’re caught short of cash. Have a plan. Execute on the plan and chase when it strays from that plan. It’s not one person’s problem if the business runs low on cash or solvency is called into question, it impacts the entire business.
Prioritise important outgoing payments
Prioritising important outgoing payments like staff payroll by ensuring other outgoing payments occur after payroll is paid. This may require communicating with suppliers if some of the outgoing payments are time-sensitive.
Shore up incoming payments
Incentivise prompt payment from customers by offering discounts for early payment or implementing automatic payment systems. By improving the accounts receivable process, businesses can increase their cash flow and reduce their financial constraints.
Secure access to a short-term credit facility
Another effective strategy for alleviating short term cash constraints is to secure additional financing. This can include taking out a loan or line of credit, or seeking out investors who are willing to provide capital in exchange for equity in the business. By securing additional financing, businesses can access the funds they need to cover their financial obligations and improve their cash flow.
Implement a robust cash management process / financial control
In addition to these strategies, businesses can also alleviate short term cash constraints by improving their cash management processes. This can include implementing a robust budgeting and forecasting system, using financial software to track expenses and cash flow, and regularly monitoring the company’s financial performance. By improving their cash management processes, businesses can identify areas where they can reduce expenses, increase revenue, and improve their financial stability.
Guard against unexpected expenses, delayed customer payments and unexpected revenue downturn
Ensure you have a sufficient cash buffer in place so that unexpected expenses and delayed customer payments don’t impact your business or cause you to lose sleep.
Don’t count unsigned contracts
Other scenarios include the classic “95% sold” conundrum of expecting cash to come in from a new customer that is most of the way through your sales pipeline. There’s no such thing as 95% sold. Signing up a customer is a binary yes or a no and counting 95% of the revenue can put your business in an unfortunate position if you are relying on cash and business that doesn’t eventuate.
Diversify your revenue
Too much of your businesses revenue in one customer can be quite catastrophic if that customer terminates, defaults or decides to alter course. Ensure you don’t have all of your revenue coming from one master services agreement or customer, even when they’re throwing business and money your way as it can eventually end. And all of the customer success and time spent making this single customer happy is not going to make a difference if the customer themselves are forced to downsize etc. The thing you can do is make sure you have a diverse range of customers, revenue and not be exposed to a single point of failure.
With proper planning and management, businesses can alleviate these short term cash constraints and ensure the smooth running of their operations. Some strategies that businesses can consider include prioritising important outgoing payments, understanding the timing of incoming and outgoing payments, implementing financial control processes, having access to short term credit facilities, and building a suitable cash buffer.