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Cash Flow Problems and Cash Flow Management

Provided by SME Solutions Center - Kenya


Cash Flow Crunches

As a small business person, you could find yourself in a tight cash situation at any time. Obviously, you would try to get out of such circumstances as fast as possible. Your cash flow management skills are needed here. To manage the crisis, you could employ several avenues, namely:  

  • Utilising any existing revolving loan facility you have with your financial institution
  • Accessing available lines of credit
  • Making use of emergency cash reserves

Cash Crisis Unpreparedness

The above cash flow crisis management initiatives are only applicable if you have appropriately anticipated and planned for such a disaster. In the absence of deliberate mitigation programmes, you need to employ different strategies. Some alternative techniques you would employ include:

  • Carefully juggling your bills  
  • Making use of factors’ services      
  • Tapping into unpaid receivables
  • Seeking loans from your suppliers
  • Making prudent use of credit card facilities
  • Leasing back your assets  

Focus on Owing Receivables

Long-Term Prompt-Paying Debtors

While exhibiting a positive outlook, honestly explain your cash flow problem to your long-term, early-paying debtors. Request them to settle some or all of their bills. To encourage their early payment, you could offer the creditors some discounts. 

Old, Deadbeat Debtors

Next, approach your longstanding debtors. Ask them to settle their bills in exchange of some attractive discounts. This strategy could be expensive. It is however better compared to the prospect of never receiving your cash.       

Lease Back your Assets

You cannot dispose of some of your assets and still be operational. Such include equipment, furniture, or communication appliances. To earn money from such assets and still use them, you could appropriately arrange with a leasing firm. In this case, you receive cash for the assets while still using them on a lease basis. The firm buys the asset and leases it to you. This alternative has certain demerits which you need to be careful about. Key downsides include:

  • The leasing firm could easily take back the assets if you default on your lease payments
  • The company is likely to impose hefty lease charges on you          

Carefully Rearrange Your Bills

Conduct a careful reassessment of your bills. Determine the most critical ones to your business. Some crucial bills include rent, wages, and utilities. Certain bills, such as creditors’ dues can be safely postponed. Take note that before you are allowed to pay later, you need to approach your creditors and explain your case. Unexplained non-payment of your bills could be disastrous.   

Utilise Factors’ Services

Usually, you will get cash in less than 24 hours if you sell off your receivables to factors. A significant downside of this alternative is the fact that you lose a considerable amount of money in form of the factors’ commissions. This cash flow management option however gives you certain benefits, namely:

  • The confidential nature of the transaction prevents your cash problems from becoming public
  • The factors assume all administrative responsibilities associated with the receivables (accounting and paperwork), thus relieving you of some burden
  • You receive cash in a very short time period

Utilise Credit Card Facilities

If you cannot access lines of credit or revolving loan facilities, consider using credit card facilities. You would treat such services as short-term loan facilities. You thus need to repay the loan in a short time period. So as to effectively wade through your cash crisis, you need to exhibit skilful cash flow management ability. A key disadvantage of credit card credit is the fact that it attracts higher interest rates than lines of credit or bank loans.

Seek Loans from Suppliers  

Go to your steady, long-term suppliers who are not your competitors. Ideally, your targeted supplier would be someone to whom you are a key business partner. Explain your cash problem, request for a loan. This cash flow management strategy is bound to work as your supplier would naturally want you to remain in business. If successful, pay the supplier promptly, thus showing your thankfulness.  

 

As a small business person, you may at times find yourself in a tight financial situation. Such constrained cash flow circumstances call for your careful deliberation so as to devise suitable alternatives for averting negative cash crunch ramifications. In the absence of lines of credit, bank loan facilities, or reserve cash for emergencies, you have a number of cash flow management options to take. These alternatives are hinged on meticulous prioritising of obligations. You could seek credit facilities from your regular suppliers. Another cash crisis management strategy would involve careful rearrangement of debts by settling the most pressing ones first. Alternatively, you could make careful use of credit card facilities. Further, leasing business assets would help in managing the emergency. You could also seek the assistance of factors who purchase receivables at a certain discount. Another option would be requesting your debtors to pay up a certain portion of their dues while offering discount incentives. Obviously, while taking the above-mentioned options, you need to take into consideration certain important caveats. 

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