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Published on June 9, 2021 |
Dealing with a sudden cash flow shortfall can absorb your attention when you should be focused on other tasks.
Even if you’re working hard to avoid shortfalls, cash flow issues can pop up despite your best efforts. A formerly reliable customer might take much longer to pay than anticipated or a large consignment might fail to show up, leaving you out of pocket.
If you’re starting a business, it could simply be taking longer than expected to turn a profit.
Time gives you options. If you suddenly find yourself in the middle of a cash flow crisis, your options are limited. The way to gain more time is through a cash flow forecast. A realistic forecast shows lenders that you’re looking ahead and actively managing your cash flows.
If you don’t already use cash flow forecasting, start by preparing both a best and worse-case cash flow forecast, so that you have a good idea of what your future financial needs will be.
Your forecast may also help you identify what caused the cash flow crunch. Lenders will ask about the cause and you also need to understand the issue(s) so you can explain the changes you’re making to avoid a repeat event. Below are some common causes and possible solutions:
There may be other causes such as the failure of a major contract or asset purchases you’ve made at the wrong time. In each case, explain the cause(s) and the action(s) you’re taking to avoid a repeat, such as diversifying your customer base or using your cash flow forecast to time purchases more appropriately.
Before you look for external sources of funding, can you free up cash from within your business? For example:
There are a number of funding options to consider, ranging from self-financing or bank loans through finding a business partner. The relative attractiveness of each option will depend on the size of your cash flow shortfall and how long you’re likely to need the cash.
If you have savings, this might be a one-off cash injection. Alternatively, you can use your personal credit card to pay for some business purchases to ease cash flow or take out a personal loan to tide your business through a temporary rough patch.
If your business can’t afford to service loan repayments out of surplus cash flow, then it may need more capital. This might apply for instance in the case of a new business that may need more than a year to break-even.
Note: This article is for information purposes only and is not accounting or investment advice or an offer to lend.