What to Do If Your Business is Facing Cash Flow Issues

Managing a business’ cashflow effectively is essential for both survival and growth. Cashflow issues are a common hurdle, especially for small and medium-sized enterprises (SMEs) that lack substantial financial buffers according to experts in SME banking in Sri Lanka. These issues can arise from various sources, including late payments from clients, excessive expenses, or seasonal fluctuations in revenue. When a business faces such challenges, it is crucial to have a plan to prevent the problem from spiralling. In order to ensure that the business remains resilient, business owners must have a proper guide to help them with facing these challenges successfully.

Understanding Cashflow Issues

Cashflow refers to the inflow and outflow of money within a business. When inflows from sales and investments exceed outflows, a business is said to have a positive cashflow. However, when outflows outpace inflows, problems arise, potentially leading to a financial crisis.

These types of challenges are particularly common among SMEs in Sri Lanka, where access to substantial financial resources is limited, and factors such as currency fluctuations, supply chain disruptions, and inflation can exacerbate financial strain. For companies handling multiple currencies, the USD to LKR exchange rate when they pay for goods or when clients want to send money to Sri Lanka can also significantly impact cashflow.

Strategies to Address Cashflow Issues

1. Optimise Accounts Receivable

Delayed payments from clients are among the most common causes of financial problems for a company. In may cases, overdue payments can stretch a business’s resources thin, making it difficult to pay bills on time or invest in growth opportunities. Here are some strategies to improve accounts receivable.

• Invoice promptly and set clear terms: Send invoice immediately upon completion of a service or delivery of goods. Clearly state payment terms and offer incentives for early settlements, if possible.
• Use digital banking to track receivables: Leveraging digital banking can help streamline the process of tracking invoices and payments. Many such platforms offer integrated tools to monitor unpaid invoices, enabling you to quickly follow-up with clients.
• Consider invoice financing: If delayed payments are consistent, consider using invoice financing to get cash in hand. This option allows you to receive a portion of the outstanding invoice amount upfront, easing immediate cashflow pressure.

2. Control Accounts Payable

While it is important to maintain good relationships with suppliers, optimising when and how you pay can significantly improve cashflow. The objective is to delay payments without incurring penalties or damaging supplier relationships.

• Negotiate extended payment terms: Many suppliers are open to extending payment terms if they value the relationship with your company. Longer terms allow you to hold on to cash longer.
• Prioritise payments based on cashflow: When the inflow of cash is tight, rank your bills based on urgency and potential consequences. Paying fixed costs, like rent and utilities, may take precedence over other variable costs.
• Take advantage of discounts for early settlements: If your financial situation allows it, take advantage of discounts offered by suppliers for early settlements. Though it requires upfront cash, these discounts can save money in the long run.

3. Manage Inventory Efficiently

For companies that deal with physical products, excess inventory can tie up valuable cash. By managing inventory effectively, they can reduce costs and free up cash.

• Implement a Just-In-Time (JIT) system: A JIT system aligns orders from suppliers directly with production schedules. It helps in minimising storage costs and the risk of obsolete inventory.
• Regularly review inventory turnover: Conduct regular inventory audits to understand which products are slow mowing. By focussing on fast-moving items, you can avoid having too much cash tied up in stagnant stock.

4. Diversify Revenue Streams

Relying on a single revenue source can be risky. By diversifying revenue streams, your business can create multiple inflows that help stabilise cashflow.

• Offer additional services or products: identify complementary services or products that could benefit your existing customers. For instance, if you run a retail shop, consider adding an online store to attract customers beyond your geographical location.
• Consider a seasonal business strategy: For those companies affected by seasonal trends, diversify your offerings to offset low-demand periods. For example, a travel agency could focus on promoting local tourism during off-peak international travel seasons.

5. Leverage SME Banking Solutions

Banks offer specialised products to help SMEs manage their finances more effectively. SME banking has evolved significantly not only in Sri Lanka but globally as well, offering tailored financial solutions, digital tools, and advisory services to companies facing cashflow issues.

• Access working capital loans: Many banks provide short-term working capital loans designed specifically for SMEs. These loans can provide immediate cash to cover expenses during lean periods.
• Utilise overdraft facilities: An overdraft is a flexible financing option that allows businesses to borrow small amounts as needed, up to a pre-approved limit. This option can provide short-term relief for cash shortages.

6. Implement Cost Cutting Measures

Reducing expenses, even temporarily, can provide significant relief to cashflow. Review all operational expenses, identifying areas where spending can be minimised without impacting the quality of your products or services.

• Negotiate with service providers: Whether it is rent, utilities or other recurring expenses, negotiating for lower rates or exploring alternative providers can result in substantial savings.
• Review staffing needs: While it is essential to maintain a talented team, labour is often one of the major expenses. Evaluating whether all roles are necessary or of temporary adjustments, such as offering part-time options, could reduce costs without sacrificing productivity.

7. Consider External Financing Options

When money issues persist, businesses may need to look beyond internal strategies and seek external financing options. With advancements in technology, options like digital banking make it easier to access a range of financing solutions quickly.

• Short-term loans: Short-term loans are ideal for bridging temporary cashflow gaps. These loans typically have shorter repayment terms, enabling businesses to avoid long-term debt.
• Lines of credit: Unlike a fixed loan, a line of credit allows a company to withdraw funds as needed, paying interest only on the amount borrowed. This is an excellent option for those that need flexibility.

8. Focus on Customer Retention and Acquisition

Satisfied customers are more likely to pay on time, refer new business, and remain loyal during challenging times. By improving customer retention and acquisition strategies, you can boost revenue and the inflow of cash.

• Improve customer service: Customers value timely responses and helpful support. Invest in training your customer service team to improve their skills and to ensure customers feel valued.
• Offer flexible payment options: Provide customers with various payment options to make it easier for them to pay, including credit card payments, bank transfers, or eve instalment plans.

9. Monitor and Adjust Regularly

Maintaining a strong cashflow requires constant monitoring. Many businesses fall into financial trouble by ignoring the signs of problems, until it is too late.

• Use cashflow forecasting tools: Forecasting tools help predict cashflow patterns, giving you valuable insights into when shortages might occur. This foresight can prevent unpleasant surprises and allow you to prepare in advance.
• Adjust strategies based on trends: As your company grows, financial needs may change. Regularly review and adjust your strategies to align with your business’s current position and market trends.

Facing cash issues can be daunting, but it is a challenge that most businesses encounter at some point or the other. Whatever reason causes it, there are effective ways to regain the financial stability you need. From leveraging SME banking and digital banking services to managing inventory efficiently and building strong relationships with clients, the key lies in proactive and consistent financial management.

In addition, you should also encourage international customers to send payment via secure, cost-effective channels, helping your business avoid currency exchange delays and related financial strains.

By implementing these strategies and maintaining a clear view of your finances, you can keep cashflow healthy and ensure that your business remains resilient in the face of financial challenges. With the right planning, these types of issues become a temporary setback rather than an enduring roadblock.