With lesser reserves and fewer financial alternatives than
corporate competitors, small businesses should prepare for the kinds of fluctuations in revenue that could prompt cash crises.
It’s wise to put together a set of policies that can help you cope with any cash shortages and keep your company afloat long enough for sales and profits to ramp back up.
If your cash-flow management procedures signal insufficient funds in the future, here are three techniques to help alleviate the problem.
1. Collect debts sooner. Many small-business owners commonly extend generous credit to customers. When your business has a cash crunch, one of the first steps in working through it is to ask customers who are “running a tab” to expedite a full or partial payment.
For example, you could:
- Send out invoices more frequently.
- Institute a “2/10/30” policy, giving a 2 percent discount to customers who pay within 10 days, backed up by a firm “due in 30 days” time limit.
- Write a series of friendly but firm requests for payment timed to go out every five to seven days during a 30-day collection period (and start sending them to every customer who has yet to pay on the 31st day after your invoice is received).
- Work with a factor who will quickly give you cash for your receivables.
2. Make payments later. A cash crunch is an excellent time to ask for extra credit from the vendors and suppliers you routinely pay. You can make a call and ask for extra time to pay, or simply take a chance and delay your next payment by two to four weeks.
Even if you forgo the small discount you’d normally get for making a prompt payment, these delays can go a long way toward easing a cash shortage.
You also could:
- Make only a partial payment.
- Ask to renegotiate the prices you pay.
- Ask for verification of the items or quantities for which you’ve been invoiced.
- Ask to consolidate several shipments from your vendor in one invoice.
3. Rent vs. buy. This is a more strategic solution to a long-term cash shortage. Avoiding equipment and other major purchases — real estate, production equipment, and so forth — can help you reduce your business’s cash requirements until revenues rebound to their expected levels.
In addition to the cash savings, other advantages of renting large assets include increased flexibility (to make changes, including scaling up or down) and reduced responsibility (for maintenance, upgrades, and end-of-need disposal).