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What is cash flow crunch? It happens to nearly every business – large, small, or in-between: a lack of funds leading to a cash flow issue. How do you avoid a cash flow crunch affecting your business? Now that’s the real question.
You can raise prices on what you sell, or ask suppliers for some payment slack. Those tactics may help but, you may also risk losing customers or damage your relationships with suppliers.
In this guide, find out how to spot potential cash flow issues and address them before it’s too late. We’ll cover the basics of a cash flow crunch, plus provide helpful solutions and strategies.
Small businesses often rely on a healthy cash flow to keep their operations running smoothly. But what happens when a business encounters a cash crunch?
A cash flow crunch — sometimes called a money crunch — occurs when a business experiences a shortage of cash to cover its immediate financial obligations. When there's not enough cash on hand, businesses may struggle to pay suppliers, employees, rent, or other critical expenses. This can quickly strain relationships, disrupt the supply chain, and even damage the reputation of the business.
So, how do cash flow problems usually start? Typically, a cash flow crunch hits when a business doesn't have enough cash flowing in to cover its expenses during a certain period.
Cash flow issues in business can be caused by several factors. Here are some examples:
Set your business up for success by implementing these six strategies to prevent or solve a cash flow crunch.
It’s not just big-box retailers who can offer their customers financing. With pay later options, you can, too. For example, PayPal Pay Later can allow your customers more flexibility in how they shop, while you get paid upfront. Offering this flexibility can also help lead to increased sales and order size.
You can help make a difference in your checkout completion rate with a few simple tweaks:
Even in today’s digital age, businesses still use paper-based invoicing to bill their clients or customers. But you know how snail mail is — weeks or months can pass between the time you send your invoice and the time you see the funds in your account.
There’s a faster way: digital (or electronic) invoicing. Not only can you save on postal costs, but you may also save time since you can send out invoices immediately.
While net 30 is the most common invoice payment term, it’s not mandatory. In fact, the 2/10 net 30 may help increase your cash flow.
A 2/10 net 30 payment term gives your customers a choice. It tells them that even though the invoice is due in 30 days, they’ll get a 2% early payment discount if they pay it in ten days. If a 2% discount feels steep, you can always start with a 1% discount, for example.
Your bank may place a hold or reserve on your funds. That means your money is temporarily unavailable to you. This usually happens with new accounts, large or out-of-state checks, and big deposits. Banks do this to make sure funds arrive before they’re available in your account.
In the past, there wasn’t much you could do about this. But today, banks are coming up with programs to help you get to your money faster. Start by asking your bank or payment processor for more information.
By projecting future cash inflows and outflows, it can empower businesses to anticipate and brace for cash flow fluctuations. The result? Businesses can better determine when cash may be tight or available, allowing for better decision-making regarding expenses, investments, and financing.
By monitoring the forecast regularly, businesses can identify potential cash flow gaps or surpluses in advance, and take proactive measures to mitigate risks, such as securing additional funding or adjusting payment terms with suppliers.
While cash flow crunches are a part of life for most small businesses, there are smart steps you can take to help alleviate them. Look at every possible short-term strategy so you can bridge the gap between the ebb and flow of your cash cycle. Maybe you can’t eliminate crunches — but you can find ways to manage them better.
If cash flow issues aren’t addressed promptly, it may lead to potentially unwanted consequences, such as:
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