Managing Your Business

Turning the Tide on Your Business's Cash Flow Crisis

If you are a small business owner, then you are probably well-acquainted with the daily challenges that come with running a company. You may also already know that the statistics for new businesses are not always so great - 50% of new businesses fail within the first five years and only 30%of those new companies will still be around after a decade.

There are a number of hurdles that most business owners will encounter within the first few years, and one of those primary issues is low cash flow. It’s approximated that 25% of new business failures can be attributed to too little money to keep the company afloat.

There are a few reasons why small businesses experience money problems:

  • High start-up costs and overhead

  • Mounting unpaid invoices

  • Economic downturn

When your business is facing financial difficulty, it’s easy to panic. It’s vital that you stay calm and assess the situation to plan the appropriate course of action for your business. Keep reading to see our top money-saving tips for businesses experiencing a cash flow crisis.

Emergency Help Available Now

In response to the COVID-19 crisis, the President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a stimulus package that included funding for small business relief programs.

Your business may be eligible for a couple of different emergency financial resources, including:

  • Paycheck Protection Program (PPP) - A Small Business Administration (SBA) loan that helps business owners keep employees on payroll.

  • Economic Injury Disaster Loan (EIDL) - An SBA loan that helps small businesses and nonprofits affected by COVID-19.

  • EIDL Emergency Advance - An emergency grant you may choose to receive in addition to the Economic Injury Disaster Loan.

For more information about these loans, how to apply, and other emergency resources, read our round-up of COVID-19 small business relief programs here.

Lose Nonessential Expenses

When business is good, it’s common to see higher monthly operations costs. You may incur costs for travel, team outings, and premium memberships to services or software. But when your business has restricted cash flow, it’s time to evaluate your expenses and cut wherever you can. Temporarily getting rid of nonessential costs can give your business the liquidity it needs to survive in a time of crisis.

If you dig into your past financial reports and yearly budget, it’s likely you can find a few line items that you can reduce costs on. Here are a few easy ways you may be able to save your business critical cash:

  • Check your recent business credit card statements and look for subscriptions you forgot you were paying for.

  • Ask your employees if there are any paid business assets that they don’t use.

  • Eliminate any planned discretionary spending, such as events, office upgrades, or nonessential equipment purchases.

Negotiate Payment Terms

When your business is in a cash flow crisis, looming supplier invoices, rent, and loan payments may put you under a lot of stress. However, you may find some financial relief by negotiating your owed payment terms.

Your business’ regular payments mean a lot to suppliers, landlords, and lenders alike, so it’s in their best interest to do what they can to support your business in times of financial crisis in order to protect their own cash flow.

Behind the invoices are real people who are experiencing similar problems. Talk to your suppliers to see if they can offer you better payment terms or any discounts. Your landlord knows that it would be difficult to replace your rental income due to the coronavirus pandemic and may be open to negotiations for lower rent or longer grace periods. Lenders may be able to set up lower payment terms or put your loan in deferral.

Make Wise Staffing Decisions

In times of economic downturn, many businesses look into where they can cut costs. Payroll is one of the largest expenses businesses have, so many owners look to reducing the number of employees they have. And while payroll is among the largest business expenses, we advise you to make wise decisions when cutting payroll costs. Your employees are your business’s greatest asset. Small business employees often feel like family and are crucial for day-to-day operations.

Your business may be facing financial difficulty right now, but you have to consider the future and your staffing needs when things turn around. If you’ve laid off the majority of your workforce during a cash flow crisis, you won’t have adequate staffing resources when business picks back up. Your remaining employees will feel overworked and undervalued, and your business may continue to struggle financially. Instead of lay-offs to reduce payroll costs, consider other options, such as cutting back on hours where you can or placing employees on furlough.

If your business offers employee health coverage, it’s also a good idea to talk to your insurance provider about how to keep employees covered if they are no longer full time or on a temporary leave of absence.

Reach out to Your Customers

If your business is struggling due to the COVID-19 pandemic, be transparent with your customers. Small and local businesses often have a community of loyal supporters. If your customers love your business, there’s a good chance they’d be crushed to see it close and would do whatever they could to help.

In this time of crisis, businesses across the country are coming up with creative ways to maintain cash flow while their doors are closed. Some businesses are offering discounted gift cards for future use, while others have set up crowdsourcing accounts in an effort to keep their doors open and employees paid; the common denominator is that they all have the support of their customers.

You work hard to give your customers the best possible experience. This builds loyalty, trust, and love. Don’t be afraid to be open about the hardships your business is facing. Be transparent and ask for help from your customers, you just might be surprised at the response you get back.

Don’t Let Customer Invoices Stack Up

Another reason that some small businesses suffer from cash flow problems is because of a low flow of money into the business. Especially for a new business, it is important that you are paid (on time) for your service/product. Some business owners may try to let things slide or offer an extended due date on an invoice in order to garner more business, but those tactics can actually be detrimental to the bottom line.

When a client does not pay their invoice, the amount owed to your business is considered debt - and not the “good” kind of debt. Racking up too much bad debt could end up sinking your business.

To avoid racking up bad debt set clear and timely invoice payment terms (30 or 60 days). You also may want to consider offering discounts to customers who pay early.

With all of that said, you can’t ignore that the people on the other end of the invoice are living through this pandemic, too. Just as it is a good idea for you to negotiate payment terms with your suppliers, negotiating terms with those who owe you might help get cash flowing into your business.

For more tips for businesses, head to our Learning Center.

Originally published on October 26, 2022, and last edited on October 26, 2022.

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