What to Do When Facing a Cash Flow Shortage

You don't need to own a small business to understand that cash flow is the beating heart of any business. 

When cash flow is low, it can lead to serious problems.

A cash flow shortage happens when the money going out is greater than the money coming in over a specific time.

This situation is serious because it affects your ability to pay suppliers, meet payroll, and cover operating costs.

However, there are ways to manage it. 

In this article, we will explore what to do when facing a cash flow shortage.

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How Cash Flow Shortages Happen

A cash flow shortage can happen anytime for several reasons, and knowing these reasons is important for anyone who wants to become a small business owner.

1. Insufficient Financial Planning

Without good financial planning, businesses can struggle to balance their cash inflows and outflows, leading to a cash flow shortage.

Sometimes, this happens because you don’t have the right financial tools to support your forecast and track your cash. 

2. Delayed Customer Payments

One major cause of cash flow shortages is delayed payments from customers. 

When clients take longer to pay their invoices, it creates a gap between when a business incurs expenses and when it receives payment.

3. Unexpected Expenses

Most businesses have an emergency budget.

But what happens when that budget isn’t enough?

You might use all of your cash reserves or take on more debt to cover these costs. 

As a result, you find yourself with less cash to meet your obligations.

4. Seasonal Fluctuations

Unfortunately, seasonal fluctuations are not a myth.

Many businesses see changes in sales throughout the year, with revenues going up and down. 

A clear example is the holiday season, which creates many opportunities for businesses to thrive, but is often followed by a slow season due to changes in consumer behavior. 

Still, this can be managed by using financial tools to predict which months will be challenging for your industry.

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5 Things to Do When Facing a Cash Flow Shortage

If you're wondering what to do when facing a cash flow shortage, the short answer is that there are clear solutions, and you should not worry about it, but in reality, you need to have a plan for the long term. 

These 5 strategies should help you face this situation.

1. Get Short-Term Financing

When facing a sudden cash flow problem, short-term financing can help you manage your expenses and keep your business running. 

You can go for:

• A line of credit lets you access funds as you need them
• Tools like Finroy offer micro-loans for different scenarios
• You can also use trade credit from suppliers to delay payments

2. Cut Non-Essential Expenses

When you face a cash flow shortage, start by saving as much money as you can. 

Review your expenses, identify which ones are not essential, and cut back on anything you can live without until the situation improves. 

You should also delay any planned purchases that are not required.  

If needed, consider negotiating a lower rent, exploring remote work options, or downsizing your office space.

3. Speed Up Receivables

If your business model allows it, improve your collection process to get paid faster.

This is especially suitable if you provide services. 

How can you do this?

• Offer discounts to customers who pay their invoices early.  
• Send your invoices earlier.  
• Instead of waiting until a job is fully complete, issue invoices every week or two for the work done so far.  
• Make it easy for customers to pay by offering different payment methods, like credit cards or digital wallets.

4. Negotiate with Suppliers

Asking your suppliers for longer payment terms is a top priority strategy.

This can help ease your financial load, at least for now. 

But when you negotiate, you should have guarantees for future payments. 

Some suppliers might give you discounts if you pay your invoices early next month. 

What happens if you owe a large amount to a supplier? 

A good deal could be set up with a payment plan to pay in smaller amounts instead of all at once.

5.  Use Cash Flow Forecasting

Every business, no matter its size, should use regular cash flow forecasting to anticipate and manage cash shortages. 

When creating a forecast, include projections for cash coming in and going out. 

Also, track trends and analyze patterns to spot potential issues before they become serious.

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Avoid Cash Flow Shortage Using Finroy

Cash flow shortages can be avoided if you know where your money is and will be. 

With the right insights, you can stay on track. 

Using AI, Finroy will explore different scenarios and create budgets for your business in just a few minutes.

On the other hand, you'll receive daily insights and feedback on how your cash is performing against your budget, so you avoid running short. 

If you do face a shortage, you can access micro loans for help.

Start here.‍