Lack of cash flow is a common reason for a business to fail, so it’s essential to have a strategy if it happens. Some of the steps you can take manage a cash shortfall are:
1. Short-term finance: putting an overdraft to work
An overdraft can be an important part of a business giving greater flexibility in business cash flow. It’s a little like a temporary loan. The interest charges applied are usually tax-deductible (but its worthwhile speaking with a tax adviser about this). A business credit card can also be of use with cash flow. It can be used for emergencies and during the peaks and troughs of your business cycle.
Find out more about Westpac’s business credit cards
Compare our business credit cards to find out which one could be best for you and your business.
2. Collect debts and negotiate terms
Where they’re achievable, short settlement periods from clients are preferable - it’s good to have an agreed contract between you from the start. You may even negotiate that they pay up-front for some or all of your services. Work with clients who pay on time and if you have a debtor who is late then talk to them about having the debt cleared, even if it’s in instalments. Early resolution is usually the best outcome as escalation into a court matter can be expensive and time consuming.
3. Review your procedures
Put some measures in place to keep the cash flowing your way. Think about the benefits to your business of:
- Asking for 50% in advance. For large transactions, it’s normal to request for a half-payment at the beginning of the work.
- Keeping on top of your accounts. Invoice as soon as possible. Follow-up gently as soon as money doesn’t arrive.
- Explaining your terms up front.
- Having rigorous credit policies.
4. Extend your terms
At the other end of the spectrum are the payments you need to make. Consider if these options would work for you:
- Hold off on making repayments until the last day possible
- Approach your suppliers and ask them for a longer grace period, in line with your debtors.
- Review your expenses.
Losing control of expenses can be an issue for small businesses. Keeping them under review and control is important. Stick to your budget as much as you can.
5. Sell stock
Liquidating stock is a quick way to put some cash in your till and clear the shelves.
6. Invoice finance
An alternative is to use Westpac Invoice Finance, where you can access up to 85% of the value of your outstanding invoices on an ongoing basis. This can be an effective way to finance your business and get access to a growing pool of funds as you grow. You can use the funds available to purchase additional stock or pay your suppliers early and ask for a discount. You only pay interest on the amount you use and no real estate security is typically required. Minimum borrowing amount may apply and credit criteria and fees apply.
7. Review your finance
Can you consolidate some of your debts into a loan? Talk to a business manager about ways to structure your business finance. It’s essential that you put money aside when you are in profit, so you have a safety net for when times get tight. Have some business savings as soon as you are able to do so.
A well planned cash flow budget, will alert you of potential shortfalls before they bite into your business. And taking note of some of our recommendations to keep the cash flowing will help you avoid reaching this stage.
This webinar is produced by the Davidson Institute, Westpac's home of free financial education resources, building confidence today for a better financial future.