HOW TO PREVENT A CASH CRUNCH

Here's What To Do If Your Cash Reserves Are Low

In Friday’s article, I shared five ways you can boost sales after a summer slump. But if your cash reserves are low right now, there’s more you’ll need to do if you’re to prevent a cash crunch after Christmas.

How To Prevent A Cash Crunch

Many businesses make 20 to 40% of their sales in the final quarter of the year. If that’s the case, why might you experience a cash crunch after Christmas? Because unless you’re in the retail, hospitality and entertainment industries, customers often put other purchases on hold in the run up to Christmas and don’t start buying again until January. For many businesses, especially those in the B2B sector, this means there can be a three to four week period in December and January when there’s not a lot of money coming in.

Go back and check your Profit and Loss reports for the last couple of years if you’re not sure whether this happens in your business.

For several of the businesses I work with, sales dip in the summer, pick up again in the last quarter of the year, and tail off again for three to four weeks from the middle of December. If they’re to avoid a cash crunch, careful cash flow forecasting and management is especially important at this time of year.

Here are five ways I’ve helped my clients to prevent a cash crunch. And you can too.

1. Prepare A Cash Flow Forecast

A cash flow forecast (sometimes called a prediction) is an estimate of the amount of money you expect to flow in and out of your business. These are some of the key reasons why preparing a cash flow forecast is so important:

Think of the cash flow forecast as an “early warning system”. It helps you to identify potential cash dips in advance. This is, by far, the most important reason to prepare a cash flow forecast.

It shows you whether your business can afford to pay its suppliers and employees. Suppliers who don’t get paid will soon stop supplying the business. It’s illegal (in the UK) not to pay your employees in accordance with their contractual terms.

It’s easier to spot problems with customer payments. Preparing a forecast encourages you to look at how quickly your customers are paying their bills. (Note: this is not a problem for businesses (like retailers) that take most of their sales in cash/credit cards at the point of sale).

External stakeholders such as your bank may require a regular forecast. If your business has taken on a bank loan, the bank may want to look at the cash flow forecast from time to time.

If you not sure how to prepare a cash flow forecast, this explanatory video will explain exactly how. The video comes with a template so that you can start preparing a cash flow right now.

2. Identify the Cause

The second step to addressing poor cash flow is to understand the underlying causes. These are just a few of the most common reasons.

  • You don’t have a large enough cash reserve to handle the slow months. If your reserves are low, this can cause a temporary cash flow issue.
  • Perhaps your receivables (money owed to you) have built up and you’ve not been collecting them fast enough.
  • If your business is seasonal in nature, cash flows may slow down in certain months e.g. December and January.
  • Small businesses that rely on a few large contracts can experience a “feast or famine” cash flow pattern.

3. Reduce Your Commitments

This is as simple as going through every line of expenditure to see whether it can be cut or at least reduced.

Start with the cost of sales to see if you can trim costs to increase your gross profit margin. If your turnover is £100,000 a year, for every percentage point you reduce your cost of sales, you’ll create an extra £1,000 in gross profits. This saving could then be used to create a financial cushion (cash reserve) and/ or boost your sales and marketing budget.

Next go through your fixed and variable costs and decide whether they’re (a) essential and (b) working optimally. Are there subscriptions you’re not using? Could you get a better deal on your utility costs? Is your marketing budget delivering an adequate return on your investment? Is an employee not pulling their weight and costing your business money? Any savings can used to create a financial cushion (cash reserve) and/ or boost your sales and marketing budget.

4. Create A Financial Cushion

A little understood reason for creating profits is to enable you to build up a financial cushion so that you have a large enough cash reserve to help tide your business over during slow periods.

The size of that cash reserve will depend on your particular business model and your tolerance for risk. Personally I like to have a ‘rainy day fund’ that’s large enough to cover at least 9 months of my business costs. For a start-up I’m working with, building up a £5,000 financial cushion is their first essential milestone.

What’s important is to start building up that ‘rainy day fund.’

5. Make Sure Bills Are Paid On Time

Start by running what’s called ‘an accounts receivable aging schedule’ to understand what monies are owed to the business and increase your collection efforts. Communicate with the customers with the largest overdue bills and get a commitment for a payment date. Depending on the amount of monies owed, you might want to bring in a credit control agency. A good credit control agency will operate a proven system that results in the collection of invoiced payments in a timely manner – without alienating your customers or risking repeat business.

Next look at the way you manage your payment process to see how you can speed it up. This might mean shortening payment terms and bringing in a credit control agency to help you manage the process. It could mean getting invoices out more quickly once a job is complete. Trades people, I’m looking at you! Or it could mean using a card payment processing software. Yes, there is a cost to using a card payment processing software, but equally there’s a cost to being paid late, and in some instances not being paid at all.

If you action these five points in conjunction with the sales advice I shared in How To Overcome A Summer Slump, you will prevent a cash crunch.

If you not sure how to prepare a cash flow forecast, this explanatory video will explain exactly how. The video comes with a template so that you can start preparing a cash flow right now.

Join The Conversation

Question: What measures do you take to prevent a cash crunch? I love reading your feedback so please do take a moment to share let me know in the comments box below.

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I’m Denyse Whillier, a Sussex and London based business coach and consultant. I work with responsible business leaders to build profitable and successful brands that do good, make money and help to change the world. I draw on Built To Succeed™, my proven success system, developed during my 8 years in the trenches as a CEO, to help my clients to achieve their goals.

I’d love to start a conversation about whether we’re a good fit to work together. Simply use this link to arrange an informal Skype coffee chat. There’s no hard sell. Just solid advice and a straightforward, honest assessment of whether 1:1 business coaching (or business consultancy) would be right for you.

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