How to manage your small business in a cash crunch

Having a strong handle on your company's cash flow can help you sail through the ups and downs that every business owner encounters. And although the core causes of cash crunches can vary, cash flow always depends on three things: revenue, expenses, and timing.

6 ways to navigate cash flow challenges

Whether you need help because inflation is eating into your margins, customer demand is falling, or you're growing quickly, here are several ways you may be able to overcome a cash crunch.

1. Cut Back Where You Can

First things first, look for ways to cut costs. Perhaps you can get away with less inventory, fewer staff members (or hours), or renegotiate supplier contracts. A close analysis of your expenses might even reveal you're paying for subscriptions and services you can do without. Or, if your credit has significantly improved, maybe you can refinance debts to lower your monthly payments.

2. Raise Prices or Expand Your Offering

You might be able to change the other side of the equation by increasing revenue. Raising prices—or offering less for the same price—can be a simple option. But it's also tricky because higher prices might decrease sales. Alternatively, if you have the capacity to take on more work, consider ways to expand your offerings and attract new customers.

3. Sell and Leaseback Assets

One way to quickly bring in cash is to sell and then lease back business equipment, vehicles, or real estate. For example, selling a vehicle you own to a dealership and then leasing it from them so you can still use it.

A sale-leaseback can give you a quick cash infusion from the buyer, helping you cover immediate expenses or investments. Plus, if you're paying off the asset, it can help your monthly cash flow if the lease payments are lower than your loan payments.

4. Ask Vendors and Suppliers for Terms

You can also try to address a cash-flow crunch by focusing on the timing of when money leaves and comes into your business. If you regularly purchase supplies and inventory from other businesses, try to open or extend net terms accounts. For example, a net 30 account gives you 30 days to pay an invoice, but you might be able to get net 45 or net 60 terms instead.

5. Streamline Invoicing and Offer Discounts on Early Payments

Accelerating payments to your company can also help you address timing-related issues. For example, switching from monthly to weekly invoicing can lead to a more steady stream of payments.

You also might have to wait a long time to receive payments when you sell to large corporations. Even if you can't negotiate shorter terms, you could incentivize them to pay early by offering a discount. For instance, perhaps you offer 2/10 net 60 terms, which means your customer has 60 days to pay the invoice but will receive a two percent discount if they pay within 10 days.

6. Look Into Different Types of Business Financing

There are also various types of financing that you may be able to use to overcome temporary cash-flow crunches.

• Credit cards. Business credit cards can be an option for financing some types of expenses, but they tend to have high interest rates. However, if you regularly pay off the balance in full, you don't have to pay interest on purchases. And if you time the purchase to align with the start of a new billing cycle, you could have around 50 days before the bill is due when you factor in a grace period.
• Business lines of credit. Similar to credit cards, business lines of credit allow you to repeatedly borrow money and pay down the balance without applying for a new account. They tend to have lower interest rates and higher credit limits than credit cards, but interest starts to accrue on new loans immediately.
• Business loans. A business loan could be a good option if you have an immediate need for the funds, such as hiring a new employee or purchasing equipment. But make sure the investment pays off and can quickly improve your cash flow.
• Invoice factoring. Factoring invoices allows you to quickly receive a large portion of the money you're owed on unpaid invoices. For instance, the factoring company might give you 80 percent of an invoice amount upfront. Once your client pays the invoice, the factor sends you the remainder minus its fee.

There are pros and cons to every type of financing, so carefully consider how each option can benefit your business.

Be Prepared for the Next Cash Crunch

A seasonal retailer or a construction company that collects progress payments always needs to be prepared for lumpy cash flow—that's a normal part of managing those businesses. But many business owners get caught off guard when the timing of payments and expenses don't align.

To help ensure you're well prepared for next time:

• Closely track and try to forecast cash flow.
• Improve your personal and business credit.
• Create an efficient invoice and payment tracking system.
• Open a savings account and set aside a business emergency fund.

Managing your company's finances is an ongoing process, and cash flow is only part of the picture. If you have questions or need advice, don't hesitate to contact a trusted accountant, financial advisor, or banker who has experience working with similar small businesses.