7 Tips for a Cash-Strapped Entrepreneur

What is a “cash shortage”?

Before we look at the strategies you can adopt when you’re short of cash, let’s first look at what a “cash shortage” is.

A cash shortage occurs when a business’s cost-related cash outflow is higher than its income-related cash inflow. It is then no longer able to meet its short-term commitments, such as loan repayment, rent, employee salaries and suppliers. If left unchecked, this situation can spiral into bankruptcy. It is therefore important to react quickly and implement measures to obtain cash as quickly as possible. Here are some of those measures.

1. Keep a close eye on your accounting and cash flow

Weekly or monthly, take the time to closely track your business’s cash flow (i.e., receipts and disbursements). This analysis will help you know whether you need to reduce short-term expenses or defer payments. It will also help you make informed decisions about any purchases you want to make.

2. Review expenses and reduce costs

Once you have analyzed each segment of your business :

• Look at where you could cut costs (renegotiate your insurance, examine your payroll, etc.) and cut out any unnecessary expenses.

Identify how you could instead boost your income and receipts (factoring or a discount for advance payments such as a 2% discount on an invoice paid within 10 rather than 30 days).

3. Negotiate extended payments with your suppliers

Do you know you’ll have trouble paying a supplier this month? Instead of ignoring them, call them. Explain the situation and ask if they could give you an extension. If you normally pay them on time, they might be understanding. Also try to see if, rather than making a single payment, you could pay them in instalments.

4. Manage your inventory better and sell your redundant assets

• Properly managing your inventory can make all the difference. If your inventory is too large, it reduces your cash flow while increasing your storage costs and losses from unsold goods.
• In some cases, it’s even advisable to sell your surplus stock at a discount. That way you’ll recover some money.
• Also, if you are not using some of the machinery, materials or equipment, it’s time to sell them.

All these actions should help you boost your cash flow.

5. Apply for a loan or a moratorium

If you are severely short of cash, do not delay in applying for a loan from your financial institution or a private investor. It can take several weeks from applying for to receiving a loan. If your SME has a good credit rating despite its cash shortage, it is likely to be approved. Of course, you will be asked to prove that you are able to repay the new loan.

Try to see whether your financial institution can arrange a moratorium on the loan’s principal payments, or refinance the loan to reduce the monthly payments. You could also finance long-term assets with a long-term loan rather than using your cash flow.

6. Invoice your customers promptly

It just makes sense : the faster you invoice your customers, the faster you get paid. Instead of having cheques mailed to you, use online invoicing and ask your customers to pay you by Interac transfer or credit card. This will speed up the collection process. Keep your accounting records up to date and regularly check which invoices have been paid and which are outstanding.

7. Get help to restructure the business

By following all these tips, you should be able to overcome your cash shortage. But if the problem persists, don’t wait until it’s too late. Ask Raymond Chabot’s restructuring specialists for help. They will analyse your situation and help you set up various recovery measures that will improve your SME’s profitability. To learn about the warning signs that a business is in financial difficulty, read our article.

Is your SME experiencing financial difficulties and you can’t see your way out? Book an appointment with one of our recovery and reorganization experts. They will help you find solutions. It’s confidential, judgment-free and the first meeting is free.