Statistically speaking, more than half of all businesses fail within 5 years of creation. When talking about tech startups, 90% eventually shut down without success. While there could be many reasons for this, a U.S. Bank study found the reason why 82% of businesses fail is due to cash flow mismanagement. This means that the right people may have created the right idea, but the cash flow alone caused them to sink. Sometimes there are deep rooted problems in certain aspects of the business which ran it into the ground (and cash flow was what brought it out to the public), while other times tweaking a few simple things can create positive cash flow and get you back on the right track.
1) Slow down the growth
Growth and adapting to changes are the keys to success for every business, especially in today’s fast paced market. Growth is the goal, simply because if you’re not growing, then eventually you will start to move backwards. However, when growth is too fast and requires additional cash upfront, it can run the business into problems. Whether it be cash to produce or sell, hiring new employees, or marketing the product, the results have to be proportional to the growth. When the cost to grow exceeds the amount of cash on hand then it is time to rethink the business strategy. Big and fast results are not always the healthiest, and sometimes slow and steady wins the race.
2) Shorten Collection Times
Allowing customers to pay late and providing more flexible options will increase sales, but this can create cash flow problems for companies, especially those that aren’t well established yet. Even more so, making sure your collection payments are in sync with your suppliers and creditors is vital for cash flow. For example, if customers have the option to pay in 3 payments over 3 months, while your suppliers need to be paid at the end of the month, this can create major cash flow issues. Customers should be invoiced immediately after the service is provided or product is shipped, in order to encourage quick payments. Providing flexible payment options and easy credit is great for customer satisfaction (and sometimes needed for lengthy services or large payments) but if it’s the difference between negative cash flow and smooth sailing, then it might be worth it to rethink payment policies.
3) Forecast More Frequently
Cash flow is not always predictable, but the more forecasting that is done, the more prepared you can be. Covid-19 was the breaking point for many companies, as they realized that forecasting needs to be far more frequent and in depth in order to thrive. For some, zero based budgeting might be the answer, while others simply need to create scenario planning for broader categories. Many companies are finding that due to the increase in outside influences on cash flow, the standard financial team is not enough anymore. Instead of hiring more financial planners to join the team, they are implementing FP&A solutions that help automate forecasting and budgeting in order to stay ahead of the cash flow data. Being that there are unlimited factors that can influence cash flow, forecasting is a necessity for identifying and fixing current cash flow issues as well as preventing them in the future.
4) Sell Non Performing Assets
Just like households, businesses accumulate a huge amount of things over time. Sometimes all that is needed for a cash flow boost is selling off irrelevant assets whose value is worth more in cash than anything else. This can be any sort of non-productive capital assets, stagnant real estate, or slow moving inventory. If a company has multiple divisions then it may be worth it to evaluate which areas are not producing and consider downsizing to focus on the real money makers. Whether it’s physical goods or paid services that aren’t being maximized, every business has assets that can be re-evaluated. While this may seem as if the organization is taking steps back, the damage from negative cash flow can be worse than downsizing. When done right, selling assets won’t only save the company from immediate doom, but can also be the beginning of new growth.
5) Consider Borrowing
The easiest way to increase cash on hand is to simply borrow it. However, this should only be done after fully analyzing the scope of the cash flow problem and after exhausting all other options. If there is a temporary problem such as one bad sales quarter or a concrete reason for justifying negative cash flow which a loan will solve, then borrowing may be the simplest and best option. However, if not enough forecasting was done, then borrowing will become a quick fix that will only push the problem further down the assembly line. A business loan or credit card advance are the 2 most common ways to borrow under these circumstances, and it is very important to understand all of the interest rates and payback options available before proceeding. Going through all of the effort to fix the cash flow problem only to be burned by interest rates later on will be frustrating and cause the process to start all over again.
6) Raise Investor Capital
Raising investor capital is usually a good thing, but similar to borrowing, the decision needs to be made with clear intention and not out of desperation. If the investor is only offering cash, while being aware of the cash flow issue, then chances are they will want a high stake in the company. If the business partner wants to be more involved and brings an outside perspective and leadership to the company, then this can take care of 2 problems- the immediate cash itself, and future cash flow. It’s important to be aware of which type of investors you want to involve in the organization and how many decisions in the company you are willing to part with before jumping to conclusions out of desperation.
7) Communicate with Vendors
Sometimes the cash flow problem is as simple as sorting out payment options and flexibility with the company’s vendors. Oftentimes, vendors will allow you to delay or negotiate payments (especially if you have been loyal to them for a while) and this simple fix can give you enough time to get the cash flow back on track. Vendors can fall under the category of any sort of payments to those that keep the business running, including utilities and rent. In the past few years many have been willing to negotiate this and there may even be government loans and flexibility options for delaying payments. The key is to be honest and develop relationships, as without that nobody will want to go out of their way to help.
8) Accelerate Receivables
Shortening collection times is good for cash flow, but sometimes that’s not enough. If the balance between cash in and cash out isn't symmetrical enough to keep a positive flow, then sometimes rethinking the strategy from the business itself is the only way out. Some companies (such as Tesla during their previous crash crunch) simply raise the customer deposit until they can keep up with positive cash flow. While not every good or service can implement customer deposits, other options such as the company accelerating production rates can also shorten the time frame of payments and leave it in your hands. Lastly, factoring can provide additional outside help in fixing cash flow issues when done in the right circumstances.
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