How to get through a cashflow crisis

By: Louise Tillotson

Date: 23 April 2012

Cashflow is one of the most important aspects of business finance and no business can afford to ignore it. In harsh economic times, it is a sad fact that even businesses with healthy sales and good order books can find themselves without cash in the bank.

What causes poor cashflow?

There are many reasons why a business might find itself without enough cash. At worst, it’s a simple case of more money being spent than the business can support with sales. When times are tough, there is also the possibility that customers will take longer to pay.

When bills must be paid yet invoices have yet to be settled, a business can suddenly find itself with serious cashflow problems.

What can be done?

Some businesses use an invoice-financing or factoring company. These take over management of invoicing and credit control by paying the business a percentage of the invoice value, with the remainder paid when the customer settles the invoice.

There are fees associated with these services, but the knowledge that a good portion of sales will be converted into cash in the bank makes this an attractive option. Factoring can also make business finance much less stressful, as the service company will chase customer debts, meaning a good relationship is easier to maintain.

Businesses can also make use of the credit terms they have with their own suppliers to ease cashflow. It’s worth checking what the payment terms are and not paying earlier than is necessary. This keeps cash in your bank account for longer.

When a sudden injection of cash is needed to either overcome a short-term problem or make a purchase, then businesses should not be afraid to speak to their investors or their banks and to go out into the marketplace to source loans. This should, of course, only be done where repayments will not be a problem.

Preventative measures

Effective financial planning is the cornerstone of business finance. It can prevent cashflow problems arising in the first place. Cashflow forecasts that accurately predict months ahead what will come in and flow out of your business bank account are invaluable.

Many businesses do not want to upset their customers, particularly in hard times, but it is essential that payment profiles among customers are studied and that customers are encouraged to adhere to payment terms.

Continuing to supply a customer when payment is not forthcoming, or accepting a string of excuses to avoid payment, can only be harmful in the long run. Encouraging customers to make payments on account can also make a real difference.