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How to cope with a cash flow crisis

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In tough times, it’s tempting to trim costs – but be careful not to cut too heavily. You should also work on getting in more revenue.

When a cash crisis occurs due to a growth spurt in your business or because you haven’t yet put down the foundations to manage cash effectively, there are things you can do from a cost and revenue position.

Cutting costs can only be done up to a point. Taking the knife to costs too quickly can mean you cut things in your business you need the most. These items could be advice from your accountant or business coach, aspects of your marketing or your much-needed insurance.

So, while trimming costs is important, it’s wise not to be too heavy-handed or to make rash decisions. While this may provide you with temporary relief, it will most likely cause you problems down the track.

Think about it: if you cut down on your marketing budget now, this could affect revenue in six months’ time. Once you’ve pruned your costs carefully, look at what you can do on the revenue front to assist your cash flow.

This is the time to keep your business stable – and it’s the perfect time to use a business overdraft.

All types of businesses can be affected by cash flow hiccups.

Think about a retail store, for example. This kind of business gets paid on the spot via cash, EFTPOS or credit card. But what if customer service standards have slipped or a competitor has set up nearby and customers are flocking there instead?

Sure, these types of businesses are not waiting 14, 30, 60 or 90 days for payment, but if customers aren’t walking in the door regularly then revenue will fall and a cash shortage starts surfacing. This is why it’s so important for all businesses to maintain marketing activities, have superior standards of customer service in order to grow and keep their customer base, and to have a customer-focused, outward-looking business.

Or what about a professional business? Say, a doctor or a solicitor moves into new premises, does the outfitting, takes on staff and buys equipment but it takes 12 months to build up the business because marketing efforts have been neglected. Not all doctors bulkbill and lawyers certainly have to wait before clients pay.

Consider the situation of a tiler who does a lot of work with developers who go bust. The tiler is carrying considerable stock. While a government stimulus package might target the building and construction area, it takes time for work to be done before buildings get to the tiling stage. In nine months’ time, the tiler could be laughing – but how do they get through the next nine-month period?

Ask yourself these questions that all relate to cash flow:
  • What am I doing now, in terms of planning, so I have solid revenue in the next three, six, 12 months – or even longer?
  • What am I doing in terms of marketing to ensure continued business?
  • Have I been to my bank to tell them of changes in my business that could affect me in six or 12 months’ time?
  • Am I about to buy new equipment that requires a hefty outlay that could be better leased?
  • How many proposals do I have out there that could bring in future revenue?
  • Am I looking after my customers so well that they would be reluctant to leave and go to my competitors? In short, am I protecting my current revenue base?

And finally, do a cash flow projection which is an x-ray of the critical structure of your business. When you do a cash flow projection, you are viewing the skeleton inside your business, by which it either stands or falls. A cash flow projection allows you to see where you will spend money and where you can get money. This is the essence of a business.

So, if you’re looking to work on your business rather than being stuck in it, book in for a complimentary business assessment today with Switzer Business Coaching

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Tuesday, May 18, 2010

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