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Dealing with a sudden cash flow crisis, even if you’re working hard to avoid shortfalls, is hugely distracting. A formerly reliable customer might take much longer to pay than anticipated or a large consignment might fail to show up, leaving you out of pocket. If you’re starting a business, it could simply be taking longer than expected to turn a profit.

Identify the causes and act

Below are some common causes and possible solutions:

• A major customer hasn’t paid on time. Implement stricter credit control and better debt collection procedures. Contact them to ensure you have the right purchase order and the invoice has been sent to the right person. Even check if your contact has gone on holiday and forgotten to pass on your invoice.
• A rise in the cost of production has eroded your profit margin. Try and source less expensive materials or supplies or decide if you need to raise your price.  Monitor your gross profit margin for any further profit slippage.
• Your business overheads have blown out. Identify specific expenses that have increased and see how you can reduce them. Regularly monitoring your net profit margins to spot any out-of-proportion increases so you can take timely action.
• Your business is growing faster than your capacity to fund the growth (your working capital). There’s usually a time gap between selling goods or services and getting paid by customers. See if you need to slow down to avoid failure through overtrading, or raise the necessary working capital to get you over the temporary cash shortage.
• Sales have been slower than predicted. Review your marketing plan and sales campaigns.  Alternatively, if you can’t see any future improvement in immediate sales, consider other markets and targets.

There may be other causes such as the failure of a major contract or you bought a large asset at the wrong time and you now need that cash reserve for working capital. In each case, understand the cause and the action you’re taking to avoid a repeat, such as diversifying your customer base or using your cash flow statements and forecasts to time purchases more appropriately.

Source finance

If you do find yourself in a cash crisis (it’s a temporary hitch and the business is still sound), there are several funding options to consider, ranging from self-financing or bank loans to finding a business partner. The relative attractiveness of each option will depend on the size of your cash flow shortfall and how long you’re likely to need the cash.

Bank loans

If you need a business loan and have a good banking track record, it could be little more than a formality to get a higher overdraft facility or access to a business loan to tide you over.

Invoice finance

If you have cash tied up in unpaid invoicing, you might qualify for invoice finance. This facility enables you immediately access to up to 80 per cent of the value of any unpaid invoices that your business might have.

Partners and investors

If your business can’t afford to service loan repayments out of surplus cash flow, then it may need more capital so you could consider taking on a business partner to invest in your business. There are advantages but also pitfalls to avoid.. Get expert advice before you act.

Family and friends

You could ask family, friends or business colleagues to help with a temporary or longer-term loan. It’s best to put the agreement in writing so that both sides are clear on what has been agreed. Be aware that this sort of agreement could strain personal or working relationships if things go wrong, so treat it as a last option.

Managing cash in a crisis is stressful for any business owner, but you do have options starting with preventative measures such as cash flow statements and forecasts and sourcing finance.