9 Insights that Can Help Pull Your Small Business Out of a Cash Crunch

9 Insights that Can Help Pull Your Small Business Out of a Cash Crunch

By: Corey Philip
Updated: February 6, 2020

An infographic from Entrepreneur on July 1, 2017 shows the harsh reality of the life of all entrepreneurs. It illustrates how small businesses such as mom and pop shops and trendy tech firms crop up all the time, yet a lot of them disappear just as quickly. An estimated 99.7 percent of all businesses in the United States are “small businesses”, meaning businesses with only less than 100 employees at a given time. Just imagine how numerous these businesses are, and all the people that are affected whenever the business fails!

There are numerous reasons behind these failures. 19% get crushed by the competition either by their fellow startups or bigger players, 23% have team issues due to lack of chemistry or the skills necessary to carry them through rougher times, 29% just run out of cash, 42% percent can’t seem to find a market for their products or services, and the most glaring of all is that 82% experience cash flow problems. 

As mentioned above, small businesses tend to run into cash flow problems frequently, which results in what is called a cash crunch – a situation when an organization does not have enough money to operate the way it should. Here are some tips and insights in getting your small business out of a tricky situation.

SWOT Analysis and other marketing tools

Keep in mind to evaluate your organization from time to time. One useful evaluation tool is SWOT analysis: Strength, Weaknesses, Opportunities, and Threats. By consistently evaluating these factors, you are basically keeping your team on their toes which helps them prepare for worst case scenarios. Monitoring your progress helps your enterprise make appropriate decisions in days to come.

SWOT is just one of the few marketing tools that every entrepreneur has at their disposal. Other tools include McKinsey’s 7S framework, Pestel Analysis, and so on. You might think that only big business players require these tools, but that is a common misconception. In fact, it is the smaller business ventures that need these tools more. 

Every dollar you have in inventory is a dollar you don’t have in cash

Small businesses have a tendency to overstock on inventory, expecting big sales to occur. Suppliers also expect to get paid. Both make this situation a gamble.

Even if you can correctly assess a strong market demand for a certain product, overcrowding your inventory means there is more cash being tied up in assets. Unsold items can quickly become a money drain if stocks are not moving as they should. 

This video can show you how you can quickly get rid of excess inventory:

Expenses are proportionate to your growth 

As your business grows, so does your expenses. Growth can be a Trojan horse, where there is a big problem carefully tucked inside a pretty solution that is just waiting to surprise you at any given opportunity.

You can have a time when you will experience peak sales but at the same time, earn less as a result of running expenses related to the growth of your business. You must always be careful about how fast your business grows and the financing you need to keep things afloat in the long run. 

Check out this video to learn how to handle the growth of your small business.

Provide discounts to customers

It works! You see, in small businesses, a lot of your revenue will be coming from your customers. It is always wise to offer them a discount whether they pay in full or ahead of time. This way, cash is always readily available throughout the business cycle.

You will even score points with your customers and they will most likely entice others. It is a win-win situation for you – faster debt recovery, adding more value to your products and services, and ample cash to keep things running smoothly. 

Profit management

Remember to manage your profits wisely. If you are enjoying peak sales in one season, it doesn’t always mean that you have to invest all your profit in more products and services. Do not put all your eggs in one basket, as they say.

Always make sure to leave some of that profit as savings so you can have a buffer or a cushion when your business falls under harsh times. Also remember that market conditions may change drastically despite your best predictions. 

Managing profits is easy to talk about, but can be hard to implement. This video by Dan Lok, a serial entrepreneur and multi-millionaire, he gives practical and easy tips on how to manage your cash flow.

Streamline your assets

Try to run an audit on your company resources and assets to identify which ones are just taking up space in your inventory or have holding costs. Sell these assets to fund your other projects or just add to your cash flow. 

Diversify your products and services 

While finding a stable niche and focusing on that is a good move, it is also wise to widen your market share by diversifying your products and services to an extent. Just having one stable source of profit leaves your business vulnerable to a cash crunch if some unforeseen event occurs. Remember how we talked about not putting all your eggs in one basket? 

However, you do not want to spread yourself too thin. Just having one or two other sources of income outside your niche helps in creating a steady flow of cash should your other ventures fail to make a profit due to undesirable market conditions. 

The video below illustrates how you can create added value via diversification, as well as the cons that come with it.

Working Capital

Working capital is a term that accountants use to describe money in the bank that you use to pay running costs and other company expenses while you wait for customers to fully pay their debts. This may be your best survival skill when you are in a crunch. It is where part of your profits should go, as mentioned earlier, to act as a buffer when times get rough so you won’t have to dig deeper in your pockets than you should. 

Paying on time and pushing back when you need to

Paying on time helps you get a good rep with vendors, suppliers, and/or property owners whom you pay your rent to. When the cash crunch happens, they may be open to the idea of giving your business some slack when it comes to payments, granting you enough time to recover until you have the cash.  

Bethany K. Laurence goes into detail on why businesses should pay their bills on time, saying it not only can save your good name but can also save you money. Check the full article here.

Takeaway

Everyone wants their business to grow and flourish, but success does not happen overnight. Sometimes, we run into challenges like cash crunches that set our goal post of success even farther. You have to put in the hard work to keep your business afloat until one day you can comfortably say that you’ve made it. If you find yourself stuck in a rut because of financial problems, or you want to avoid issues in the future, then put in the effort to try any of the tips and insights listed above.

Corey Philip
February 6, 2020
Corey Philip

Founder of a home service / specialty trade contracting company (think patio's and deck) with a focus on customer experience. Quantitative investor. Data driven marketer. Runner.