prevent cash flow crisis

How To Prevent Cash Flow Crisis In 6 Ways

Softcodes Insight
Spread the love

Monitoring how money is entering and leaving your business is a recipe to prevent cash flow crisis from happening. Keeping track of money is very fundamental.

A common misconception that many people have is regarding profit as cash flow. They’re not the same. For example, you have generated profit and experienced business growth, but you’re unable to pay your suppliers because your money is tied up in inventory. Not being able to pay is because of cash flow despite you making a profit. 

Without further ado, let’s get into the topic.

Below are the ways to prevent a cash flow crisis from happening.

1. Embracing a Cash Flow Forecast

Projecting or planning into the future of how finances would look like in the future is amongst the ways to prevent cash flow crisis. Embracing this will make you avoid shortfall(s).

You can simply get started by just listing your revenue sources and running costs on a monthly basis. Don’t also forget to take variables like seasonal changes, government policies, etc. into considerations.

Be realistic when doing this.

2. Be on Top of Your Receivables and Payables.

Being on top of your receivables means sending out invoices without delay and going after outstanding payments. Be up to speed with your customers’ payment dates without giving room for irregularities or delays.

Being up to date with payments lets you plan and manage your cash flow effectively.

As for your payables, it is necessary you have payments terms with your suppliers before you go into business with them. The industry-wide standard is 30 days.

3. Cutting Down on Expenses

Evaluate all your expenses/payables, look for ways to eliminate unnecessary expenses or reduce the necessary ones. A good example is if you can have an online meeting, why do you need to travel down, you would have cut down on transportation, feeding, accommodation, and so on if you go through this route.

Another thing you can do is to use good negotiation skills to strike good bargains for you and your business. It can be in the form of payment terms, comparison with different vendors, and so on.

4. Effective Stock Control

 If you’re not on top of stock management, you can easily have a crisis. Earlier in this article, I used stock management to differentiate between profit and cash flow.

There is a need to constantly be up to date on stock levels. In simple terms, too much stock or inventory can tie up your money and under-stocking can lead to lost sales or revenue. 

A simple approach to stock control is to know when to restock, how long it’d take the stock to be delivered, how long each stock item was on the shelf before being sold. All this can be automated by using inventory or stock control software.

In fact, I’ve written an article dedicated to stock control and cash flow. The title is, 3 WAYS TO IMPROVE CASHFLOW: The Stock Control Approach, click on the hyperlink for further reading.

5. Credit Access and Relationship With Financial Institutions

Another way to prevent cash flow crisis is to get credit facilities from financial institutions when the need arises. This will keep you operational.

Having a cash flow crisis might not necessarily be from a negative point of view per se. What do I mean by this? Let’s say, one of your products is selling massively in a new region, and you’ve decided to set up shop in that region to fully harness the opportunity.

There might be a need to deploy personnel, tools, processes that translate into costs that weren’t budgeted for, thereby leading to a cash flow crisis. This is where credit facilities come in.

What you also need to do is to have a good relationship with the financial institutions that are based on trust and credibility. This will help your business should you need credit access in the future.

6. Be Ahead of Issues Before They Occur.

You can be ahead of cash flow problems before they happen by observing economic situations, constantly updating your cash flow forecast, being on top of stock control, monitoring your payables from customers, negotiating better deals, and taking action when you see issues.

Conclusively, if you feel overwhelmed or want to automate all the tips mentioned above, you can do this with the help of business management software, also known as ERP Software. You can get started by contacting SOFTCODES here.

Leave a Reply

Your email address will not be published. Required fields are marked *