Most Kenyan public corporations are perennially ridiculed when reports on possible bailouts emerge in the media. Kenya Airways, the postal corporation, Kenya power just to name a few, are among the usual candidate for bailout by taxpayers. Similarly, privately owned firms may find themselves under intense stress caused by higher operational costs than revenues collected.
Cash flow crises can still strike despite the meticulous planning, as seen in the present COVID-19 economic upset. Businesses have unexpectedly plunged into threatening situations due to low revenues coming in, while the usual expenditure continues to draw money from them. These difficult situations are however navigable, following simple approaches.
Firstly, a cash crunch calls for intense evaluation of the business where operator asks themselves probing questions. Evidenced by the low revenue streams in terms of purchases and rented items, there could be commodities that are no longer selling.
In an era where consumer preferences are always changing, this is no surprise. The inherent action is moving to clear the clogging caused by slow moving stock. As part of streamlining inventory, equipment and other production implements that have registered a decline in usage should be dispensed with.
Selling the slow moving stock at lower prices and disposing of minimally used equipment can help generate much needed cash. A business can creatively dispose the commodity by turning them into bait in the form of freebies. The prospect of getting additional items for free after making a purchase might work the trick of drawing in more customers.
With the all too familiar scenario of settling business costs out of your own pocket, it is apparent that you avoid drawing any subsistence from the business. It is conventional for business owners to draw a stipend from their businesses for their spending, however, during a cash flow crisis, this should be completely off the table.
The idea is to minimize deductions from the revenue. A business operator should seek alternative funding including for their own expenditure in order to allow the business to regain strength.
One of the ways to pump funds back in to the business is to improve debt collection mechanisms. Money owed by debtors is very important in balancing the scales. It is imperative that the business owner should have a strategy for soliciting payment.
It is good practice to always inform debtors in good time by timely sending of invoices. To hasten payment disbursements, a business owner should create incentives for early payments. Discounted amounts for settling bills in the shortest time will motivate customers to bring in cash on time, as well as strengthening the ties that exist between the two sides.
The local business scene is plagued by an entrenched borrowing culture and acquisition of goods and services on credit. While it is African tradition to look out for others, giving on credit should be checked because it easily leads to bad debts.
Unsettled arrears ultimately hurt the cash flow in a business, and a continued trend sanctions the eventual collapse of the business. Entrepreneurs should therefore, be vigilant to ensure customers do not take advantage of their kindness.
Proper scrutiny of customers prior to granting credit is important in reducing incidents of defaulting.
During a cash flow crisis, the business owner can closely inspect their business plan, expenses, operations and processes.
The inspection will be useful in determining why there is cash flow shortage, whether it is or will become a recurring issue and how to handle it if it happens again in the prospective future. This will help in cutting costs by focusing on services or products that only generate your business money. Furthermore, it can be insightful in making decisions on letting go of customers who may be costing you more money than they bring into the business. In certain scenarios the business owner may even be forced to relocate their business to a new locality. After a careful analysis of the target market in his/her current location, the business owner may decide to find a different location where there are more potential customers that can translate to better profit margins.
Laying off dispensable employees can also be a useful technique in managing cash flow crisis in a business.
To minimize effects of a cash flow crisis, working on a Cash flow Budget is important. A typical cash flow budget helps predict cash inflows and outflows on a daily, weekly or a monthly basis. Creating a cash flow budget can help predict your business cash flow gaps, when cash outflows exceed cash inflows when combined with your cash reserves.
It allows you to take steps to ensure that the loopholes are closed or narrowed to avoid expensive and uncontrolled overdrafts. These steps might include lowering your investment in accounts receivable or inventory, increasing or advancing receipts, or looking to outside sources of cash, such as a short-term loan, to fill the cash-flow gaps. If applying for a loan, you need to create a cash flow budget that extends for a few years into the future as part of the application process.
A cash flow budget helps predict future events early enough for you to take some corrective action and minimize the amount of uncertainty involved in the budget preparation.
The process of Preparing a cash-flow budget involves: Preparing a sales forecast, projecting your anticipated cash inflows, identifying surpluses and the opportunity to place short-term money on deposit to earn interest and identifying longer-term surpluses to fund expansion and development.
From a prevention perspective, keeping in touch with customers and understanding their potentially changing needs is key. Now, more than ever is the time to have open discussions with customers and suppliers to understand how all parties can work together for mutual benefit and survival and identify opportunities to work in new ways, and with different partners. If a supplier is able to, for instance, waive late fees on accounts past the 90 days’ deadline, this could help relieve a lot of cash flow pressure and establish a positive working relationship.
Knowing about additional requirements or changes to operation during the lockdown can also help partners manage their own business arrangements and minimize further impact across a heavily interconnected network.