Cash flow is the lifeblood of any business. Although it may seem obvious, cash shortfalls are the primary reason behind the failure of most companies — once their cash flow turns negative, they have little recourse to pay employees and meet other liabilities. Cash crunches tend to cluster in a handful of common categories, each of them with their own strategies for mitigating the resulting damage or even for preventing them in the first place.
Why cash flow can run dry
The most basic reason a business can find itself short of cash is the result of poor budgeting and planning. However, there are other scenarios to consider, as well. Even the best entrepreneurs aren’t always able to keep cash flow positive in a seasonal business. Cash could run out simply due to an unforeseen event, like a drawn-out legal problem or a serious accident that proves too expensive, or supply costs could rise suddenly.
Cash flow crises aren’t all negative, however. Sometimes business owners experience sudden success and receive an influx of business. Buying raw supplies, increasing staffing, investing in machinery to increase production all cost money, and when you have more going out than coming in, cash flow is an issue.
Another challenge common in companies with a spike in business or those that rely heavily on a single or limited number of customers: cash flow gets tight because accounts receivables are slow to come in, leaving cash short even for a company with increasing sales.
Preventing cash flow shortages
In each of these situations and many other common causes of a cash crunch, there are a few key resources business owners can rely on to pull their business out or prevent such a shortage from happening. The best of these solutions involve turning assets — like outstanding invoices or incoming revenue — into working capital. That means gaining access to cash, paying off the most urgent liabilities, and getting back on track.
Working with a trustworthy financial institution, or even a company’s own clients, returning to cash-flow positive is possible in a few different ways, including:
- Accounts Receivable Financing: Turns accounts receivable into funds that can quickly pay pressing expenses like payroll and supplier invoices.
- Business line of credit: A pre-authorized credit account available as needed to meet short-term cash flow needs.
- Short-term business loan: Provides an infusion of cash that’s repaid in a small amount of time, resulting in less long-term debt.
- Trade credit: A negotiated agreement with vendors or suppliers to extend credit or provide an advance on an existing contract.
- Treasury Management: Services that help develop an accurate cash flow forecast and provide cash flow tools to accelerate the collection of accounts receivables and the management of accounts payable.
Acting quickly to solve cash crunches
When cash flow runs short, time is of the essence. While each of these and other options are available to many businesses, they also consume time that might not be available when it’s most needed. That’s why it’s important to create a plan for solving cash flow shortages before they happen. Small business owners should not only take stock of their financial situation and budget processes, but also work to understand where they can turn in the event of an emergency cash flow need, or even a time-sensitive opportunity that demands fast funding.
It’s difficult for most business owners to plan for every possible scenario. That’s why we recommend working with an expert at First Business to help you fast track your business cash flow planning by presenting options to help if you encounter a cash flow crunch. A true financial partner you can trust in stressful times provides value and peace of mind to bridge the gap when you’re building a successful, long-term, healthy business.
Questions on How to Prevent Cash Flow Shortages?
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