What Happens When Your Cash Flow Stalls?Posted by Factor Funding Co. on January 12, 2017
It happens to the best of us – sometimes, cash flow simply isn’t strong enough to keep a business afloat. As a business owner, it’s your responsibility not to give up, but to know what to do when your cash flow dries up. You can achieve peace of mind when you keep track of your money and create a plan for lean times. Organizing cash flow is simple with the right tools in your toolbox.
Forecast a Cash Flow Stall
Knowing about a cash flow issue ahead of time can mean the difference between getting a handle on it and having to close your doors for good. The only way to predict a cash flow stall accurately is through cash flow forecasting. First, look at your business history and use this information to estimate how many sales you’ll likely get in the next month. Look at the same month last year and factor in any major changes, such as business improvements and promotions.
Make a sales forecast and decide when you’ll receive payment for these potential sales. Not all businesses operate on the same payment schedule. Gauge when you’ll see money coming in based on the average amount of time it takes for your clients to pay their invoices. Then, figure out how much your company spends. Add in your fixed costs, such as payroll and rent, and variable costs, such as those relating to your product or service. Finally, subtract your expenses from your revenue to come up with your forecasted cash flow. If it looks like it will run thin or stall completely, create a plan for how to proceed.
Prepare for Potential Problems
It’s important to have an idea of what can happen to a small business when there’s not enough cash flow. The obvious answer is that the business can no longer operate, but this isn’t exactly accurate. First, you’ll dig into your cash reserves if you have any. This may float you until payments from clients start coming in. Your suppliers might be willing to operate on credit, but most likely won’t if you’re just starting out.
Soon, the lack of cash will start affecting your business. You may have to turn down a job because you don’t have the supplies to fill the order. Your employees might quit because of late payroll. Investors may start pulling out, leaving you in a tough position. Before you start asking your friends and relatives for loans, understand all your options. Understanding the problem and having a plan to move forward can save your business.
Find New Ways to Pay
Luckily for small business owners, it is possible to remedy a cash flow stall without getting into debt or losing major clients. Several alternative funding options to traditional bank loans can offer better rates and returns. Consider peer-to-peer lending, alternative lenders, and institutional lenders. One of the most popular funding alternatives for a small business with cash flow issues is invoice factoring.
Invoice factoring, or accounts receivable factoring, can give a small business the money it needs – in cash or a line or credit – when it needs it. The application process takes much less time than bank loan applications, and you can receive the money within days. You don’t have to repay the money you receive from factoring, as it’s not a loan. Your business won’t fall into debt, and you’ll have the cash you need to keep operations running. With factoring, you can put the money you receive toward anything you need. There aren’t any strict restrictions or strings attached. Once your factor sends you payment for your invoices, it’s yours.
Cash flow stalls don’t have to mean the end of your business. With the right forecasting, problem planning, and options for alternative funding, you can successfully manage a stall until revenue picks back up. Don’t let a lack of preparation on your part make a cash flow issue bigger than it has to be. Take control of your future by mastering cash flow planning.