5 ways to avoid a cash flow crisis
by Bija Knowles
Your company's ability to operate normally can be severely hampered if cash flows dry up – here are some ideas on how to avoid this happening and what to do if it actually does.
1. Don't rely on your primary source of funding
If you're relying on financing from a bank or group of banks, for example, getting an alternative source of funding in place while business is running smoothly could be a useful strategy. This is how Nike managed to avoid a cash flow crisis in its early days, when its main line of bank credit was pulled – as described in this article How Nike survived a cash flow crisis. Author Tom Roberts writes: “Thanks to [Nike's founder Phil] Knight’s foresight to bring in a secondary funder, the Japanese trading company saw the potential of Nike’s business and stepped up with additional money to bridge its funding gap. The rest, as they say, is history.”
2. Look to your supply chain
Supply chain finance programmes can free up cash flows for both buyers and suppliers in the supply chain, by allowing the buyer to extend the payment terms and providing earlier cash payments for the supplier. Because supply chain finance programmes are off-balance-sheet, they enable companies to improve cash flows without increasing levels of debt. For more insight into choosing the right supply chain finance programme for your company, see this article Which Supply Chain Finance program is right for you?
3. Keep financial statements up-to-date
Having regularly updated financial statements won't avert a cash flow crisis but it will help to ensure you have an excellent view on your company's cash flow situation. It may even give you some warning of problems up ahead so you can prepare and put some back-up strategies in place to ensure you are able to maintain liquidity.
4. Focus on accounts receivable
Ensure your invoicing is up-to-date and that all invoices are sent out quickly. Other options to consider are reducing payment terms as much as possible and offering a variety of payment methods. Offering discounts for very prompt payments could also tempt some customers to pay ahead of the payment due date. See this article for more suggestions on how to make accounts receivable efficient: Seven tips for a happier financial supply chain
5. Look around for credit
Your credit might have crunched for any number of reasons – a problem with customer payments, commodity price rises or the withdrawal of credit from a funding partner. In each case, if your current funding partners are reluctant to provide further credit, explore borrowing opportunities with other lenders, as some might be willing to offer attractive deals to win new business.
Like this item? Get our Weekly Update newsletter. Subscribe today