Anticipating cash flow problems

Managing cash flow begins with an understanding of the specific cash requirements of your business. Proper planning and forecasting of these requirements can help to avoid severe cash shortages.

Business owners involved with business-to-business sales are particularly vulnerable to cash-flow problems. Here are some ways to anticipate and manage cash flow issues before they escalate:

Prepare cash budgets
These budgets should be prepared on a monthly basis to include fluctuations in cash due to the seasonality of your business. Consideration of external factors and the consequences for your business, such as an economic slowdown, need to be incorporated.

Some questions to consider include whether your sales levels will remain the same, whether your customers continue to pay their bills or will collections slow and whether suppliers will continue to provide your with the inventory to operate.

Review discretionary spending
Any items that are not essential to current operations can be deferred or eliminated. Such expenditures may include travel, meal, entertainment, advertising and bonus payments. Caution does need to be exerted not to eliminate or defer spending that will affect business’s ability to generate revenue.

Review existing borrowing
Existing borrowing facilities should be reviewed to ensure your business’s borrowing capabilities are maximised. The short-term operating requirements should be financed with current assets and the long-term capital requirements are financed with long-term assets.

Businesses with a need for extra cash may consider borrowing from an alternative lender capable of providing increases margining of current assets.

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