Responding to cash flow shortfalls
As your business grows, you will need to find money to pay for more staff, bigger facilities and increased production costs. If your business grows rapidly and the growth is largely unplanned, you'll risk overtrading by not having enough working capital (cash for day-to-day expenses) to fulfil your expanding orders.
Not having enough working capital in the critical time between investing in growth and realising the profits is a common problem for businesses experiencing rapid expansion. It can easily ruin a business. However, there are a number of strategies for dealing with short-term cash shortfalls.
Dealing with cash shortages
There are a number of immediate ways to fund unexpected cash shortages, including:
- collecting outstanding debts
- increasing prices
- borrowing money – for example, by refinancing or arranging an overdraft
- negotiating better payment terms with suppliers – for example, delaying payment in exchange for regular or bigger orders
- negotiating better payment terms with customers – for example, by offering discounts for prompt payment, encouraging automated payments or insisting on deposits first
- identifying any non-core business assets that can be sold for cash
- using factoring or invoice discounting services – a company lends you money, collects your debts and manages your books for you.
An equally effective way of increasing your liquidity is to reduce or avoid any unnecessary costs to your business by:
- taking no unnecessary money out of the business while its cash flow is limited
- opting to lease or hire-purchase new premises or machinery rather than buy outright and incur more debt
- delaying any increases in salaries
- reducing overheads – for example, substituting business travel and face-to-face meetings with conference calls.
Monitor and forecast cash flow
To improve your cash flow in the longer term, however, your business will need to better manage its cash flow, particularly if you are planning further expansion.
By monitoring and forecasting your cash inflows and outflows, you can better predict cash flow shortfalls and organise debt finance ahead of time if necessary. With adequate working capital in order, you'll then have more time to manage other aspects of your rapidly expanding business.