Managing cash flow is every manager’s or entrepreneur’s challenge, every day, every year.
Keeping a close eye on daily activities and emerging industry trends can help reduce your business exposure to the chill of a cash crunch. In an increasingly competitive world, you need to be alert.
How can you predict, avoid and/or, minimize the impact of a cash emergency?
Pay attention to cash shortages
Pay attention when any cash shortages arise. When cash gets short, pay close attention and be prepared to act. Questions to be answered include:
1. What caused the problem? Pre-payments to take advantage of special discounts can reduce cash. Transportation strikes, for example, could delay shipments and therefore payments. An industry (or economy) slowdown will often result in customers stretching out their payables.
2. How can you cope? If cash on hand is not robust, let the special discounts go. It’s usually more cost-effective to pass on a discount than to borrow to overcome a shortfall. If you hear about any threatened strikes and/or disruptions to your supply chain, make sure you have a back-up position. Even if temporarily more expensive, it can save your business by showing your customers your reliability and versatility in challenging times.
If necessary, tighten credit terms, but use discretion. Being firm but supportive to your customers will go a long way in keeping them in the fold while still giving you a better cash flow. Defer purchases and/or negotiate extended payments if cash gets short.
Most importantly, document both the signals of problems and your solutions. That way, if the signals happen again, you can refer to prior successful action as a first possible solution.
Watch Sales
Any prolonged drop in sales without a comparable — and simultaneously emerging — reduction in expenses is a prescription for trouble.
Of course, there is usually some lag between sales changes and a compensating contraction in expenses, but early diagnosis can reduce the negative impacts significantly. Once a changing trend has been identified, act promptly or the impact of the lag will be more severe.
Review the budget
Review the budget. If short-term borrowing is regularly needed to meet normal operating costs, the unavailability of such loans or a sudden change in operating expense could be devastating.
If ongoing operations cannot be supported by sales, either more sales are needed, fewer expenses must be incurred or a combination of the two is in order. While this sounds very simple, a lot of businesses hesitate “in hopeful anticipation.” If remedies are not introduced on a timely basis, a severe cash crunch could follow.
Beware of pet projects
A pet project is any business activity undertaken for ego value rather than consistency with the mission and profit targets. Sometimes new ventures or ongoing cost/profit centers can often lead to cash flow problems. Failure to recognize and deal with a pet project when a cash crunch looms has been the death of many businesses
Many cash flow challenges have such simple origins. Often it’s simply a matter of days, or weeks and they can creep up on you, in fact the daily grind can cloud your vision, encourage false hope or distract you just long enough for problems to take hold.
You can learn from past and/or current cash shortages.
You can be watchful that sales, budget and R&D costs stay in line.
You can keep a lid on pet projects.