Cash flow
Entrepreneurs often realise they have a ‘cash flow’ problem only when they face liquidity constraints. Here's how you can overcome such issues before they happen. Image Credit: Shutterstock

Dubai: Cash flow problems are an all too common reality for entrepreneurs and small- to medium-sized business owners. While such problems can have many causes, the end result is always the same — a lack of available funds to cover daily costs of running a business. So what can you do?

“Entrepreneurs often realise they have a ‘cash flow’ problem when they are unable to pay those who supply to their business or meet payroll obligations of those they employ, on time,” explained Dr. Rashid Hammad, a UAE-based business mentor and entrepreneurship coach.

“Failing to meet these basic operational needs impact a business' ability to achieve or maintain profitability, which often leads to knock-on effects of its own. But it's important to realise that cash flow problems are not unavoidable, and when they do occur, they are not always unbeatable.”

When does a business owner have cash flow problems?
Aside from the obvious reasons such as delayed payments or poor planning, there could be multiple other reasons for a business owner to face a cash crunch, such as unexpected business growth, rising costs, unexpected expenses, or simply the lack of consumer demand.

So a cash flow problem occurs when the amount of money flowing out of the company outweighs the cash coming in. This not only causes a lack of liquidity, it can also limit your ability as a business owner to make payments, repay loans, pay your bills and run the business.

How can business owners overcome such cash crunches?

When business owners find themselves in a cash crisis, their immediate reaction is to borrow, said Hammad. “Before you look for external funding, see if you can free up cash from within your business. There are four effective methods to go about doing that.

1. Modify your payment system

“Firstly, try simplifying your payment system in such a way your customers or clients make timely payments. This might mean adding one-click payment links to invoices or allowing alternative payment options like direct debits, instalment payments or recurring payments,” he added.

“You could also incentivise for early payments and penalise for late payments. For example, you can offer a 2 per cent discount on invoices paid within 5 days and charge 2 per cent interest for each month an invoice is late. This helps prioritise timely payments that support healthy cash flow.”

2. Defer unnecessary expenses

Another best practice when you are facing a cash crunch in your business, is to defer unnecessary expenses. “To plug your business cash flow leak, you need to not only postpone certain costs, but also understand your buying pattern,” said Zahid Majid, a Dubai-based serial entrepreneur.

“If you study your purchases and bank statements carefully over 12 months, you would be able to figure out the gaps that you should fill. You should defer the expenses which are not necessary so that you can save in this tough period.”

Stock Entrepreneur Business
Even if you do end up borrowing money, Majid said it’s vital to first know how much is feasible to you and your business.

3. Track due dates of key expenses

While you are cutting down on your unnecessary expenses, Hammad advised it is just as important to make a list of the essential expenses with the due dates, as it’s a given that there is no going away from the essential expenses.

“It will help you get a clear picture of what your monthly commitments are which you have to meet. Also, with clear due dates in your mind, you would be able to manage your available cash better and make the payments closer to the due date rather than making them early,” he added.

4. Match ‘receivables’ with ‘payables’

Next, you need to start managing your ‘payables’ and ‘receivables’ efficiently. Imbalance in the two with payables becoming more than receivables is one of the primary reasons why any small business faces a cash crunch.

What is the difference between ‘payables’ and ‘receivables’?
‘Receivables’ are funds owed to a business for services rendered. ‘Payables’, on the other hand, represent funds the firm owes to others, like payments owed to suppliers or creditors. ‘Receivables’ are categorised as a cash flow generating asset, ‘payables’ are seen as liabilities.

“Often times, among businesses, buying and selling happens on credit and there are times when you do not get your payments back on time. On the other hand, there are creditors that you have to pay because of your commitments irrespective of the payments getting delayed,” added Majid.

“In case you are facing delayed payments, you can explain the situation to your creditors. Similarly, you can persuade your debtors to pay up fast, so that your business can get adequate cash flow and you can meet your delayed commitments.”

What to keep in mind when borrowing during a cash crunch?

Even if you do end up borrowing money, Majid said it’s vital to first know how much is feasible to you and your business, which in turn will depend on the size of your cash flow shortage and how long you’ll need the cash.

“While one of the easiest and most preferable routes of handling a cash crunch in your business is by opting for a loan, you still have choices between a business loan, personal loan, or any other category of loan,” he added.

“With a business loan, a loan is taken on the guarantee and performance of the business. Since you can get a collateral-free loan in case of a business loan, businesses prefer to depend on such instruments as they can be paid in monthly instalments.”

Bottom line?

Even though you will be able to get additional funds by getting a loan for your business, in case you are struggling to make ends meet when managing your business’ cash flow, Hammad reiterates that you should consider cutting back on or keeping track of your existing expenses before borrowing externally.

“In order to do that, it helps to create a ‘cash flow forecast’ – which is an overview of your expected and actual income, expenditure, assets (what your business owns), and liabilities (what your business owes). This automates the process of tracking your cash flow based on where you need to cut back and this will make it much easier for your business to stay on top of your cash flow.”