How To Sustain A Business Amidst A Cash Flow Crisis?

Poor cash flow is a substantial contributor to the failure of small-scale businesses like start-ups and MSMEs in India. The situation becomes direly troublesome in the face of difficult economic scenarios and severe market competition. 

Formulating a comprehensive and thoroughly analysed continuity plan along with a systematic cash flow forecast is, therefore, imperative to sustain against all odds.

Unfortunately, there is not any specific turnaround strategy or rulebook that can pave the way out of such a financial block. Every organisation needs to customise an individualised turnaround strategy per their business needs and consider the main cause of a crisis. 

Having said that, there are some general rules business owners can follow to keep their business afloat amidst a severe cash crunch.

Six Essential Steps To Combat Cash Flow Crisis

• Review Credits

Delayed payments from clients can significantly affect cash flow health. Organisations, therefore, should review the total credits they’ve extended and implement a strategic procedure to accelerate receivables. Entrepreneurs should extend credit only to clients with a history of timely payments. 

Furthermore, in the case of new customers, business owners should be cautious and ask for a percentage of the receivable upfront instead of invoicing it for later. Also, organisations should send the invoices on time and offer convenient and multiple payment options to ensure faster receivables.

• Consider Borrowing Options Like Invoice Discounting

In case of a severe crunch in the working capital, business owners can opt for invoice discounting via leading cash flow solutions providers like KredX. ID allows business owners to leverage their unpaid invoices as collateral and receive a percentage of their receivables as a credit against a minimal service charge. 

The same facility is also available under invoice factoring. However, invoice discounting is confidential. Herein, organisations do not have to transfer the sales ledger or credit control activity to the lender. Instead, the organisation collects due payments from customers, ensuring trust and credibility.

• Formulate A Cash Flow Budget

During a crisis, you must stringently maintain a budget. A detailed cash flow budget will let you accurately estimate inflow and outflow during a particular business cycle. Detailed cash flow budgeting also forecasts the spells when the crisis will be critical and the periods when there will be a surplus. 

Such detailed insights incredibly help plan out important decisions like when you should undertake a capital expenditure or whether to restrict expenses to maintain a steady cash flow.

• Negotiate The Payables

If an organisation faces a severe crisis, one of the important steps to consider is negotiating and delaying the payables to restrict cash outflow. This will help strike an equilibrium and reduce the strain on a company’s already dwindling working capital. 

To that end, entrepreneurs should formulate plans and accordingly negotiate with loyal vendors on transparent grounds to delay or least reduce obligations. 

• Look For Raising Suitable Investors

One of the fastest methods to increase cash flow and improve the working capital is to sell equity to interested investors. However, this means sharing a portion of ownership with an investor. 

Therefore, business organisations should choose investors carefully. In addition, entrepreneurs must conduct thorough research and analysis to confirm they are collaborating with the right partner. It’ll help avoid conflicts in the future that can severely jeopardise an organisation’s integrity.

• Seek Out Options Like Revenue-based Financing

An attractive alternative to equity financing is revenue-based financing. It is one of the healthiest and most convenient methods to mitigate a cash flow crisis. Business organisations can leverage their projected weekly, monthly or annual income and get credit from fintech companies like KredX. It’ll require them to pledge a certain percentage of their future revenues, payable over a flexible tenure. 

Unlike equity financing, there is no transfer of ownership stake to investors. Also, the application process is completely digital, and one can obtain the necessary funds within a short period.

Bottom line

Mitigating a cash flow crisis is not an easy task. It requires a detailed study to identify the causes and outline procedures to facilitate sustainability. Business owners should work on preparing a budget and tracking the profit margin from the onset to avoid a cash crunch. 

However, in case of unforeseen situations along with personalised planning, the methods enlisted in this rundown can be of great help. It can help maintain business sustainability and improve cash flow.