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We recently shared steps to free your small business from debt. Now, we’re giving you strategies to survive a cash flow crisis, before it turns into debt that strangles growth of your business. Monthly cash flow refers to the amount of money a business brings in and pays out. Sometimes there’s a timing mismatch, when payments are due to employees or vendors before the company receives money for goods or services. Many small businesses operate with limited reserves, so they can’t cover dry periods. Even if annual earnings exceed expenses, there are many other reasons why a business may not have enough cash in its bank account to cover bills when they’re due, like start-up costs before production or seasonal work. 

Whether your small business is experiencing a cash flow shortfall or you want to avoid a crisis, financial advisors recommend the same first step: make a cash flow projection. Gather a comprehensive summary of your weekly payments and bills for a 3-month period. Accounting software like QuickBooks® provide detailed reports of these categories. Start with your current cash on hand and add when and how much you expect to receive additional income from customer invoices, investments, and other sources. Next, figure out how much you need to pay, what it’s for, and when it’s due for the same 3 months. Entrepreneur.com recommends using detailed categories so you can spot opportunities to postpone, decrease, or eliminate costs. “Have a line item on your projection for every significant outlay, including rent, inventory (when purchased for cash), salaries and wages, sales and other taxes withheld or payable, benefits paid, equipment purchased for cash, professional fees, utilities, office supplies, debt payments, advertising, vehicle and equipment maintenance and fuel, and cash dividends.”

Once you build both sides of your cash flow projection, you need to compare daily income to expenses. The total expenses tells you the minimum amount needed in your business accounts to cover your responsibilities. Whenever the costs are higher than the revenue, you need to make adjustments to avoid late fees, interest, damage to your credit rating, and other penalties for missing payments. As Entrepreneur.com summarizes, “The basic idea is to improve the speed with which you turn materials and supplies into products, inventory into receivables, and receivables into cash.”

Follow these strategies to fix your small business’s uneven cash flow:

• Stop paying for things you’re not using. Sell any old, outdated, or unused inventory or equipment. Check the terms in contracts for early cancellation of leases and subscriptions services that are unused or underused, including storage spaces.

• Get your money faster. Ask customers for payments promptly with a printed bill or emailed invoice on the final day of service. Follow up with customers who have outstanding balances and consider shortening your payment window to 2 weeks on future invoices. You can also encourage early payments from clients, like giving a 2% discount for paying in full by a deadline. 

• Get your money first. Kickstarter (and similar) campaigns introduced the idea of paying for something before production begins. For example, bands allow fans to pre-order an album before they begin recording it, which funds the engineering and manufacturing.

• Don’t pay bills before they’re due. “Take full advantage of creditor payment terms,” recommends Entrepreneur.com. “If a payment is due in 30 days, don't pay it in 15 days. (Then,) use electronic funds transfer to make payments on the last day they are due. You will remain current with suppliers while retaining use of your funds as long as possible.”

• Be open with lenders and suppliers. If you’ve built a trusting relationship, they’re more likely to offer creative solutions when you’re facing a cash shortfall. Banks want to loan money to someone who plans ahead, not someone who was surprised that they ran out of money. They want to make sure they get repaid! In Business Owner’s Playbook, The Hartford advises,”If you’re in a temporary bind, explain that to your vendors. They might give you more leeway in making payments until your situation improves. If you have strong relationships with long-time vendors, they might be more inclined to give you a break, and that could also be in their long-term best interest.”

• “Tighten credit” offered to customers, continues The Hartford’s Playbook. “Be cautious when providing credit. Run a credit check on new customers,… have them fill out a credit application, (and) check references.”

2 final warnings:

• Entrepreneur.com cautions,“Choose the bills you'll pay carefully. Don't just pay the smallest ones and let the rest slide. Make payroll first—unpaid employees will soon be ex-employees. Pay crucial suppliers next. Ask the rest if you can skip a payment or make a partial payment.”

• Kalin Kassabov’s advice about creative financing is especially helpful because she points out what to avoid and pursue. “When you're experiencing cash flow challenges, it's tempting to seek loans and other types of financing. However, you should be cautious and make sure you completely understand the terms. Short-term loans, for example, usually come with very high interest rates that may actually harm your cash flow in the long run. On the other hand, make sure you research loans backed by the Small Business Administration (SBA), which offers a variety of loans with favorable terms.”


Ultimately, the best position for your small business is monitoring your cash flow to proactively resolve shortfalls. However, sometimes there’s no way for you to anticipate a sudden drop in revenue (like a global pandemic). These tips will help you to act responsibly and quickly to manage your company’s finances before it sinks from imbalanced cash flow.