How Should Businesses Deal with Cash Flow Shortage

28 Mar How Should Businesses Deal with Cash Flow Shortage

The most important aspect of cash flow management, especially for small businesses, is to avoid long-term cash shortages due to having an extreme gap between cash inflows and outflows. Staying in business is impossible if you can’t pay your bills for any extended length of time. But the question remains: How to deal with cash flow shortage?

Proper cash-flow management means you comprehend the concept of every inflow and outflow of cash, and never delegating the function. Theoretically, you must delay every outlay of cash while encouraging everyone who owes you money to pay it promptly.

Negative cash flow happens when the incoming cash won’t be enough to cover the outgoing cash necessities of your business, which includes expenditures. Cash inflow derives from different sources such as your interest income, capital contributions, sales, and borrowed funds.

Accurate management of cash flow paves the way for the company to evaluate the business status in terms of cash inflow and outflow. In the process, you will be able to figure out on whether the possibility of surplus or shortfall in cash may happen.

During early months of trading, a start-up business is challenged by cash flow problems. Basically, the business may run out of funds if it’s unmindful of effective management and planning of cash.

How to deal with cash flow shortage in your business—whether big or small? Now, take these accurate and resounding moves to exceed cash inflows than outflows:

Reduce or put off other expenses. Identify areas where you can reduce costs. A sound option is to renegotiate payment terms with suppliers rather than eliminating expenses outright to lengthen your payment timeline and lessen the impact on cash flow.

Reduce Growth Rate. Growth consumes cash. Reducing your growth rate on temporary status to conserve money is a viable option. However, be cautious as this strategy poses a long-term risk as it may hurt your prospects for raising outside investment if investors see a modest or stagnant growth rate. Project a win-win situation for your moves.

Consider giving employees incentives instead of cash compensation. Salaries are one of the most significant expenses a company incurs. Instead of a slightly minimum cash payment, go for a thorough incentive-based approach. Preferably, incentives must pose a more significant advantage status than the salary level itself.

Issue additional equity to employees. You have the option to issue equity in exchange for foregone cash compensation. Money losses should be reduced. Through issuing equity, it strengthens the dedication of the workers because they feel that when the company succeeds, it will also create a positive impact on them. And they’re part of it!

Deferred compensation. Instead of giving additional equity or incorporating an incentive plan, you may simply defer payment and promise to pay employees a bit later. You may allow cash advances of a more viable amount. If you have a small team and the deferral is only temporary, this can be a good option.

Reduce Manpower. This is painful, but a workable option if you face a more permanent cash shortage. But remember: a reduction in personnel can also damage the morale of the remaining team—sometimes it creates a negative impression on the business status. If you intend to cut down on the number of employees, you need to ensure a positive outcome so that you go over it once in a decisive manner. Overcome the condition and move on.