A cash crunch will negatively affect your business from top to bottom.
Finding yourself in a financial bottleneck—no matter what industry you’re in—can lead to stalled operations, unpaid wages, and, in extreme cases, bankruptcy if proper steps are not taken to improve the situation.
Keep reading this blog to learn more about cash crunches, how they happen, and four helpful tips to avoid them as a business owner.
Also known as a liquidity crisis, this occurs when an individual, business, or organization does not have enough available cash or liquid assets to meet their short-term financial obligations or operational needs. Essentially, it means you do not have the money to cover immediate expenses such as bills, salaries, or outstanding debts.
A cash crunch can have serious consequences, including the inability to pay employees, suppliers, and lenders on time. It can lead to a damaged credit reputation, missed business opportunities, and even insolvency if not effectively managed.
The first and most obvious cause of a cash crunch is a decrease in revenue as less money coming in makes it harder to cover expenses. When this is exacerbated by higher debt levels or rising interest rates, your business can quickly find itself in a serious jam.
Market changes and seasonal fluctuations can also play a role in a cash crunch as your business struggles to catch up. The same can be said for businesses in the process of expanding, as their operations outpace their revenue.
General mismanagement of funds, as well as delayed payments from customers can also contribute to a potential crunch. The same can be said for external shocks that are completely out of your control.
These are just some of the many reasons why cash crunches happen—now let’s look at what your business can do to avoid them entirely.
Cash is king: you’ll have enough money if you don’t waste it.
You need to promote responsible spending and careful decision-making. Effectively managing your finances starts at the top. Be careful about who can spend your company’s cash, especially as it pertains to company credit cards.
Being careful and controlling your cash spending will help you better project what numbers will look like down the line. In turn, having more accurate projections will help you mitigate the risk of a crunch as you manage your working capital.
Furthermore, be sure to keep an eye out for unnecessary business expenses that can be cut to boost the amount of cash your company has on hand. Re-negotiating insurance policies and implementing automation and/or AI are two places to start.
Negotiating more favourable terms and agreements with suppliers and vendors can go a long way to helping your business avoid a cash crunch.
For example, transportation companies could look to negotiate longer payment windows for expenses such as fuel. The same could be said for logistics companies across multiple levels of their supply chains. Having 45 days to pay for these compared to 30 could be the difference between paying on time or accumulating debt.
While you may ultimately have to make it worth their while, negotiating for this increased wiggle room can be especially helpful when planning for seasonal changes or during a time when your inventory is strained.
Dealing with customers is another area where being proactive is key.
Implement clear payment terms for your customers and clients. You should never find yourself owed money because customers are unclear about how to pay. Be sure to send invoices promptly and follow up on overdue payments—do not expect anyone will be in a rush to hand over their money to you, even if you have done great work.
Also, consider the customer experience. This will build rapport with your clientele and simultaneously incentivize them to pay on time. This is the kind of outside-the-box thinking you need to implement to stay ahead!
Invoice factoring, also known as accounts receivable financing, is a great way to help your business avoid a cash crunch without needing to renegotiate existing contracts, cut staff to save on wages, or chase down your loyal customers.
Here’s how it works: a business hands over its outstanding invoices—the money they are owed and will eventually be paid—to a factoring company in exchange for immediate cash. This shifts the burden of collection onto the factoring company, giving your business the money it needs when it needs it.
Businesses across all industries can benefit from invoice factoring, but those that handle invoices with long turnaround times stand to gain the most. Staffing agencies are one example of this, with invoice times that often exceed 120 days.
Ultimately, the benefits of accounts receivable financing are plentiful. The fees collected by the invoice factoring agency as compensation for their services are nowhere near those you’d experience on late payments.
Furthermore, the flexibility afforded to you by invoice factoring will allow you to operate successfully. This can be a game-changer for small businesses looking to expand, or those with primarily non-liquid assets.
The negative effects of a cash crunch cannot be overstated: stalled operations and unpaid wages can easily destroy your company. While there are ways you can avoid one yourself, working with REV Capital is your best option.
We’re a leading invoice factoring company that specializes in helping businesses like yours avoid cashflow crunches. You’ll never be left wondering where your money is with 24/7 access to our online portal and our transparent fee structure. You’ll also have access to a Dedicated Client Relationship Manager who has a thorough understanding of your business needs.
Contact us today to get started!