7 ways to avoid a business cash flow crisis

No business, whether it’s a brand new startup or a longtime enterprise, can survive without cash flow.

Cash flow is the movement of cash into or out of a business over a given period. In a healthy business, cash inflows exceed cash outflows.

Business cash flow - Analyze your numbers

However, even profitable businesses can fail without sufficient cash flow. For example, if revenue from completed or future sales hasn’t entered your account yet, you may struggle to have enough cash on hand to pay receivables that are due immediately such as payroll, supplier invoices or creditors.

Follow these tips to make sure you don’t get caught in a cash flow crunch.

Business cash flow tip 1: Analyze and forecast

You can’t manage what you can’t see. Prepare a regular cash flow statement (quarterly, monthly or weekly) to analyze exactly where the company is making and spending money. Once you spot some recurring patterns, make a cash flow forecast to anticipate things like seasonal fluctuations in sales or spending, clients who often pay late or large expenditures that quickly drain cash.

A forecast helps stabilize cash flow by supporting strategic actions you can take before anticipated fluctuations. For example, you can make proactive adjustments in hiring, pricing, cutting spending or seeking lower-cost suppliers.

Related: Get 10 tips on running your efficient business, including how to do a two-year cash flow analysis (see tip #3)

Business cash flow tip 2: Set payment parameters

According to a study from Intuit, 37 per cent of small businesses in Canada say it takes them more than 30 days to get paid — and 25 per cent have more than $20,000 in outstanding receivables. Ouch!

“The problem isn’t that (businesses) don’t have funds in the pipeline – it’s that they don’t have the funds when they need them for real-time expenses,” the study concluded.

To avert this situation, be clear and upfront with customers about how and when you expect to be paid. It’s critical to always make payment arrangements in advance and ensure there is a legitimate contract in place.

Instead of invoicing weekly, monthly or quarterly, do it as soon as you finish the work or fill the order. For long-term projects, invoice upon meeting key milestones rather than after completion.

Business cash flow tip 3: Encourage prompt payment

Adopt a policy to charge interest to – or halt business with – clients who don’t pay invoices after 30, 60 or 90 days. It may feel like a ‘strict’ rule if you haven’t done this before, but it can save your business dollars, time and hassle.

Another consideration is to offer discounts to customers who pay early, which can help speed up your cash inflows.

Business cash flow - Review open invoices

Business cash flow tip 4: Automate processes

To get paid more promptly, ask customers to make payments electronically via direct deposit, Interac e-transfer® or an eCommerce Merchant Services solution rather than sending cheques in the mail.

ACU also offers the Customer Automated Funds Transfer (CAFT) system that allows you to set up automated debits and credits to streamline your accounts. If you use additional software or apps to automate other processes like invoicing, bookkeeping and accounting, then tracking and managing cash flow will also be easier.

For example, many of these tools can automatically send invoices, pre-schedule them, issue recurring ones, notify you of unpaid invoices and send reminders to clients of overdue invoices. Many online platforms even feature dashboards to alert you of potential cash flow issues at a glance.

Business cash flow tip 5: Build a cash reserve

Over time, put cash aside to build up a reserve so you can still pay three to six months of bills in case of emergencies, seasonal sales dips or big expenditures like hiring employees or buying equipment. For businesses during financial downturns or crises, this strategy can save their operations.

Business cash flow tip 6: Revisit your payables

Take a fresh look at your payables to spot places you can reduce outgoing cash flow. Wherever possible, lower your costs by renegotiating repayment amounts or schedules with suppliers, financial institutions, creditors and retail or office space landlords.

Business cash flow tip 7: Raise quick cash

If you sense a cash flow crunch coming, generate some quick inflows by selling equipment, discounting products and services to boost sales or arranging financing through a loan or business line of credit.

Every business will feel the cash flow crunch at one point or another, so it’s important to have a contingency plan to mitigate any issues. That way, if an unexpected dip happens, you’re prepared to put your plan in place. The goal is to stay ahead of any issues, and to have the right financial partners by your side.

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If you’re interested in improving your cash flow or would like to understand the options for business loans and lines of credit, we’re happy to chat. Set up an appointment and meet with your trusted ACU financial advisor to discuss any business considerations.

About Christine Wong

Christine Wong has been covering business and technology since 1995, when Mark Zuckerberg was in sixth grade. A former associate producer at Business News Network and Slice TV, Wong freelances while chasing after the biggest story of her life — Ben, who is 10.

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