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Help manage your cash flow in a crisis

A key part of running a sustainable business is having a steady cash flow. Here are some strategies to help avoid running out of cash, particularly when an unexpected crisis arises.

3 minute read

All businesses need a positive cash balance to remain operating. It’s cash flow which pays the bills and allows trading to continue. So, if you’re struggling to find customers due to an unexpected crisis, or face costs outside your control, the need for cash can be even greater.

Identify the key warning signs

Plot out your current expected sales and expenses and cash flow projections. Then apply a percentage reduction in sales and expenses or inventory to see what happens to your bottom line. If at any stage your cash flow goes in to the red, it’s time to act.

Monitor the key warning signs

Decide which warning signs hint at a deteriorating cash situation. Comparing short-term performance to the long-term cash forecast can quickly reveal if sales and profits are going to plan. For example, you could monitor your gross profit margin every day, week, or month to ensure it’s not slipping.

Things that can affect your gross profit margin could be:

• increases in raw materials or product costs
• reductions in profitable sales
• discounting
• wastage
• customer returns
• late paying customers.

You could select two or three key warning signals that matter to your business, set up regular monitoring, and then remedy any decline.

Improve operational efficiency

Consider how your business can operate more cost effectively while maintaining or improving its efficiency. Take time to document every step of your business process and identify any roadblocks or bottlenecks that make it harder or slower to complete work. Anything you can do to unblock these issues can help improve your capacity to do more with less. It may be useful to ask for help from industry experts, your banker, or other small business owners. The Regional Business Partner Network is a useful place to start, connecting you to a local business agency for you to talk to.

Non-financial red flag warnings

You could develop red flag systems on less obvious warning signs as it’s often not the sudden loss of sales that hints at trouble ahead. Warning signs could be customers taking longer to confirm a sale, fewer phone queries, less web traffic, reduced social media engagement, and fewer customers making contact, or walking through the door.

Use accounting and cash flow software

Accounting software allows you to access, interpret, and analyse information coming straight from your bank account daily. If you are considering using software, you could search online for a solution that suits your business or ask your accountant, financial adviser, or other small business owners in your industry what they recommend. At BNZ, our cloud-based system CashFlow Plus, is creating a more seamless and simpler cash flow experience for businesses. The online dashboard plugs straight into existing accounting systems, enabling customers access to funding of up to 80% of the value of their unpaid invoices in under 10 minutes, which means quicker access to working capital.

Request progress payments

When negotiating contracts with customers, be aware of setting payment terms that could help your cash flow, such as deposits, or progress payments. Including a regular timetable for customers to pay invoices as part of any agreement and confirming milestones for the work to be completed can help minimise the chance of the customer disputing any invoice.

Invoice immediately

Make sure all your work is invoiced immediately and with larger customers, it can be a good idea to check you are in the current payment cycle. You could also consider offering immediate payment options that allow you to accept payments via your phone like BNZ Pay, or you could shorten your payment terms, for example from 20^th of the next month to seven days.

Tighten credit control

An efficient credit control system helps speed up your cash collection and reduces bad debt by limiting how much credit you provide to customers. You could consider collection options such as:

• using credit scoring systems and setting appropriate credit limits
• credit checking all customers
• monitoring late payments
• setting up a process to follow up with debtors
• charging interest on late payments
• as a last resort, using a debt collection agency or specialist lawyer.

Manage inventory carefully

Tighter controls over your inventory can help your business hold just enough to service your customers on an on-going basis without running out. For example, if you cut 20 percent from your inventory levels, you wouldn’t need to replace these items the following month, saving you the cash outlay. You could identify seasonal peaks and troughs, set a target stock-turn, and consider selling off any slow-moving, old, or obsolete inventory.

It’s important to be aware that even if you are profitable, a lack of cash flow can impact the long-term viability of your business. Have a contingency plan in place to access cash reserves and audit your business regularly. This can help identify what could be turned off, re-used, cut down, saved, or improved to help your business avoid running out of money during a crisis.

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This article is solely for information purposes. It’s not financial or other professional advice. For help, please contact BNZ or your professional adviser. No party, including BNZ, is liable for direct or indirect loss or damage resulting from the content of this article. Any opinions in this article are not necessarily shared by BNZ or anyone else.

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