A cash flow shortfall occurs when a company lacks sufficient liquid funds to cover expenses and financial obligations. It’s estimated that about 80% of businesses fail because they are unable to overcome a severe cash shortage. The most common factors that contribute to cash flow problems include:
• Late customer payments
• High overhead costs
• Poor inventory management
• High debt payments
• Lack of accurate forecasting
Fortunately, modern tools, like Cash Flow Updates, will assist you with proactive cash flow forecasting and predicting when a shortfall might happen, so you can identify issues and take corrective action before a crisis ever materializes. In this article, we cover critical strategies that will help you avoid a cash shortage and maintain a strong financial position for your organization.
Cutting unnecessary expenses
A key benefit of implementing a cash flow tool for accurate forecasting is that you can see exactly when cash shortages will occur, so you know what the necessary timeframe is for increasing revenue and/or cutting costs. Cash Flow Updates makes it easy to review expenses and identify areas where you can reduce expenses without affecting operations and push sales or arrange financing if it would be difficult to change the expenses. This strategy includes improving inventory management and eliminating nonessential expenditures.
Optimizing asset management
If your business has capital tied up in non-critical assets, then effective cash flow forecasting can help determine when it’s time to sell them. Whether it’s unused equipment, excess office space, or company vehicles that aren’t essential to operations, liquidating these assets can provide an immediate cash boost. The key is to assess your assets before a cash flow crisis forces a rushed decision.
Understanding your borrowing options
When forecasting reveals a temporary cash shortage, securing short term financing might be a viable option. Business lines of credit or short term loans can bridge gaps, but they should be approached cautiously. It is important to look into borrowing options early, before they are required, based on the projections provided by your cash flow tool. The goal is to use financing strategically—make it sure it’s there when you need it most, and only take advantage of it if you have a clear plan to repay without accumulating excessive debt. You can add those numbers into your cash flow to determine the impact before you actually commit to borrowing, however.
Act early and act decisively to avoid a cash shortage
The best way to survive a cash flow crisis is to see when it will happen and prevent it from occurring. In order to do that, you need proactive cash flow forecasting and management. An accurate cash flow tool gives you the ability to anticipate shortfalls, enabling you to adjust spending, optimize your assets, or secure financing, as needed.
With a program like Cash Flow Updates, you can assess the impact of expense and revenue fluctuations well in advance of having the problems actually occur. Prior to making any business decisions, simply input the numbers into your projection to see how they affect your future cash flow. Doing so will help you identify potential issues with current expenses, so you can strategize effectively to solve the increased revenue needs.
If you want to avoid a cash shortage for your business, then you need Cash Flow Updates. By developing comprehensive projections of where your financial situation is headed, you can maintain a healthy, successful company.
