How Can Small-Business Owners Handle a Cash Shortage?

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Even the most successful business may experience financial hardship at certain times.

As we all saw, the pandemic put a significant dent in many small businesses’ cash flow, forcing owners to scramble to come up with solutions.

Though the government provided some financial support in that scenario, there may not always be readily available solutions for cash flow problems. Here, finance experts discuss how small business owners can handle a cash shortage.

Identify the Root of the Problem 

What is the source of the cash flow shortage? It’s imperative that you figure this out, ASAP, lest the problem fester and worsen. 

“The first priority is to immediately figure out what has caused the cash shortage and fix it,” said Manny Skevofilax, a business consultant at Portal CFO Consulting. “Otherwise, your business is in jeopardy of failing.”

In the opinion of Skevofilax, there are three main reasons for a cash shortage. 

“The first reason is that maybe your business became unprofitable — maybe you made an error when you costed out a contract and it led to you losing money on it,” Skevofilax said. “Perhaps you have grown your business too fast by adding more new employees than your business could handle to pay, bought new equipment, and/or moved into a bigger, more expensive office space.”

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“The second reason is that you may not have enough working capital in your business,” Skevofilax said. “Every business has a cash cycle which is defined as the time it takes to collect its accounts receivable versus the time its accounts payable are due to be paid. For example, if your accounts receivable terms are 60 days and your accounts payable terms are 30 days, then you have a 30 day cash gap. You need to have enough working capital to cover this 30 day cash gap. If your business qualifies, you could use a line of credit from a commercial bank to finance the 30 day gap. As soon as you collect the accounts receivable, you would immediately repay the amount you borrowed from your line of credit.”

“The third reason is that perhaps you are taking too much money out of the business for yourself. It is important to note that every business has its own set of financial metrics,” Skevofilax said. “It means that, based on the financial metrics in your business, it can only afford to pay you so much. For example, perhaps your business can only afford to pay you $80,000 annually, but you require $150,000 in order to live. This problem will cause a cash shortage in your business which may be difficult to solve.” 

Examine the Next 5 months 

“Total up all the cash you’ll receive and need to pay out,” said Brian Trzcinski, a certified exit planning advisor and director of business market development with MassMutual. “Then, look at whether your pricing needs to change due to inflation, supply chain issues or changing consumer interests and update financial forecasts accordingly.”

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Negotiate with Suppliers 

Costs — and/or payment timelines — are not always set in stone. In many cases, one may negotiate with their suppliers to get a better deal or at least, more time to pay down a debt.

“For example, a small business owner may negotiate with a supplier to extend the payment deadline from 30 to 60 days, allowing them to hold onto their cash for longer before having to pay for goods or services,” said Kimberly Harness, business consultant and founder of Wiki Pro Solutions. “Alternatively, they could negotiate a discount for paying invoices early, which would incentivize them to pay sooner and potentially reduce the overall amount owed.”

Take Care of Your Billing 

Got any outstanding invoices? Handle those — and any other billing matters — pronto. 

“To prevent late payments, send invoices as early as possible and make them as clear and precise as feasible,” said Abdul Saboor, a full stack developer at The Stock Dork. “Also, it may be advantageous to alter other billing methods, such as invoice frequency. Instead of waiting until the end of the month, generate an invoice immediately upon delivery of the products or services. You may wish to investigate progressive invoicing for large orders while you make the goods or provide the service. For instance, you can request a deposit along with the order and then a portion of the payment at specific milestones. It is simple to lose sight of a past-due account and neglect to follow up on it. The longer you remain out of contact with a customer, the less likely it is that you will be able to collect the debt.” 

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Make It Easier For Clients To Pay You

Saboor also recommends considering offering incentives to consumers who promptly pay their invoices. 

“Also, make it as simple as possible for customers to pay you,” Saboor said. “For instance, you can include a payment link on your invoice so that your clients can pay with a credit card.”

Reduce Expenses 

This method can be brutal, but it’s often necessary: reducing expenses. 

“This most often involves cutting back on salary and benefits, or reducing overhead costs by cutting back on office space and supplies,” said Musnad E Ahmed, CEO and founder of SkyTech Solutions, a company specializing in building businesses from scratch and scaling them. “Additionally, owners might consider temporarily suspending any nonessential operations and re-allocating resources towards higher priority tasks.”

Seek Outside Capital 

Another option is to seek outside capital. 

“Small business owners can reach out to friends, family and other investors to raise funds,” Ahmed said. “Additionally, they can approach banks and other financial institutions to apply for a loan or a line of credit.”

Look into Alternative Financing Options, Like Crowdfunding 

“Finally, small business owners can look into alternative financing options, such as invoice factoring, merchant cash advances and crowdfunding,” Ahmed said. “These options allow businesses to leverage their existing customers or network and generate revenue in a short period of time.”

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Jordan Rosenfeld contributed to the reporting for this article.

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