Avoidance is the number one Modus Operandi for business owners when they are suffering a cash flow shortage and unable to pay their suppliers. As a result, business owners can destroy their credit rating, their reputation and their existing business relationships. So what is the alternative? Communication!
Every business owner has experienced times when the cash coming in has not caught up with the cash going out! The worst thing you can do is hope that it goes away – because it never does!
So what do you do when you’re suffering restricted cash flow?
Tip 1 – Ring, Ring, Ring, Why Don’t You Give Me a Call!
Contact your suppliers as soon as possible and explain the situation. Don’t simply ring and say that you can’t pay. Make sure that you can offer a solution that includes specific details on when you can pay and how much. Then ensure that you stick to this agreement. Communication is the key here.
99% of the time, this will keep your suppliers at bay. If they are also business people, they usually understand because often they’ve had a similar situation at some stage. Also smart suppliers want to make sure that they maintain a relationship with you, so usually they’ll offer some flexibility. However remember that they are not a bank. They also have wages and payments to meet, so don’t abuse this strategy.
Tip 2 – When You Owe the Tax Man
If you owe money to the Tax Man, ensure that you ring them immediately. They’re not as scary as you think!
The Tax Man is like any other supplier – they’re happiest when you pay, or when you communicate to them WHEN you can pay. They are usually open to putting a payment plan into place where you outline how much you can pay and when. But you need to ensure that you keep up-to-date with all future tax accounts.
Tip 3 – Offer Shares in Your Business in Lieu of Payment
If you have a large amount outstanding to a supplier, why not think laterally about the payment. Perhaps offer them shares in your business in lieu of payment. You may be surprised what response you get. Use a good accountant and legal advisor to put this into place for you.
Tip 4 – Invoice Discounting
If you have a large creditors list, and you’re caught short, you may want to look at Invoice Discounting as an option. Simply put, it’s a line of credit against what you are rightly owed. Your bank will assess the credit worthiness of your debtors and will then provide you up to 80% of the face value of your invoices within 48 hours. The remaining 20% is returned to you when the debtor pays. However, banks are only interested in those invoices where goods or services have already been rendered.
Invoice discounting can be smart business as it accelerates the cash flow that is rightly yours. For example, if you are a labor hire company who pays contractors on 7 day terms, yet your client pays you on 21 day terms, then you have 14 days where you will be caught short. Invoice discounting can provide you with an ongoing facility, at a cost comparable to overdraft rates.
Check with your bank, but there are companies who will let you provide security by way of the book debts, along with a registered fixed and floating charge over some or all business assets. They may also ask for a directors guarantee, however they won’t necessarily encumber your home.
But do your homework. There are a range of fees and securities involved and each offers a different timeline for payment.
Tip 5 – Create Short Term Credit Facilities
The best time to establish a credit facility is when you don’t need it! Contact your bank to see if you can establish an overdraft facility where you are only charged if you use it. Sometimes a small amount in reserve can help you get through shortfalls – but make sure it’s an emergency fund only!
Tip 6 – Save for a Rainy Day
One of the smartest people I know says that business budgets are no different to your personal budgets. We’re always being told to save in our personal lives, the same goes for business. Ensure that 10% of your income is dedicated to a savings or investment plan of some sort that gets a good interest return and ensure that you only utilize it when you absolutely need it.
Preventing future cash flows is the best strategy overall. Make sure that you have a process in place that assists you to keep track of your budgets. For more information on creating a Financial Management system, complete with ready-made templates, have a look at http://www.innovabusiness.com for more information.