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Fulton Bank
Fulton Bank

Managing Your Small Business in a Cash Crunch

There are many reasons why small businesses experience sudden cash flow crunches. The first step is to identify the reason your cash crisis and then build an action plan to help solve the problem.

Potential cash flow issue causes:

External factors have caused a sudden drop in demand

The ongoing COVID-19 pandemic has dramatically affected small businesses throughout the country and beyond. Decreased foot traffic, changes in regulations, the growth of online purchases, and more can impact sales. Develop a contingency plan to decide what steps you can take to improve cash flow and increase sales, depending on whether it will be a short term or long term disruption, your plan could change.

A large customer hasn’t paid on time.

Check in with your customer to ensure there’s not a larger problem. It could just be a simple oversight, perhaps your contact is on vacation or forgot to process your invoice. Many of your customers may be experiencing similar cash flow issues. Discuss the issue and the need for a different invoicing structure to make timely payments.

A rise in the cost of production has eroded your profit margin.

Your first step should be to try and source less expensive materials or supplies. You could also consider raising your prices to counteract the increased cost. Make sure to monitor your gross profit margin on a regular basis for any further profit slippage.

Your business overhead has increased.

Identify specific expenses (lease, utilities, employee cost, etc.) and see how you might reduce them. Check your net profit margins to spot any out-of-proportion overhead increases so you can take action.

Your business is growing too quickly.

You don’t have the capacity to fund the growth with your working capital. There’s usually a time gap between selling goods or services and getting paid by customers. Meanwhile there are bills to pay. See if you need to slow down: don’t accept every new job or order that comes in, select only the most profitable and those that pay on time.

Sales have been slower than predicted.

Review your marketing plan and sales campaigns. Alternatively, if you can’t see any future improvement in sales, make sure your business is still viable by going back to your original feasibility plan to see what went wrong.

These aren’t the only causes, but often the most common. In each case, understand the cause and the action you’re taking to avoid repeating the issue, such as diversifying your customer base or using your cash flow forecasts to time purchases more appropriately.

If you do find yourself in a cash crisis, consider the following funding options. The relative feasibility of each option will depend on the size of your cash flow shortage and how long you’ll need the cash.

Find internal funds

Before you look for external sources of funding, see if you can free up cash from within your business. You should also consult with your accountant or business advisors for advice on how to handle your cash shortage.

  • Offer customers a discount for early payment or ask them to pay up front.
  • Ask customers to pay by credit card now rather than invoice for payment later.
  • Hold a sale of surplus or slow-moving stock to raise cash.
  • Ask suppliers to take back excess stock and give you a credit or longer payment terms.
  • Sell under-used assets and rent the equipment only when you need it.
  • Downgrade or sell vehicles to raise capital and lease them back with monthly payments.

Apply for a bank loan

If you need a business loan and have a good credit history, consider a higher line of credit or access to a business loan. Talk to your accountant and business advisors before taking this step. You’ll need to have records of financials and other information prepared for the bank.

Take on partners and investors

A business partner might be a source of capital. There are advantages but also pitfalls to taking on a business partner, so get expert advice first from your accountant and your lawyer; they may also know suitable investors. Be aware that you’ll need to share the ownership of your business if you go down this path.

Ask family and friends

You could ask family, friends or business colleagues to help out with a temporary or long-term loan. It’s best to put the agreement in writing and get everyone to sign it, so that both sides are clear on an agreement. Be aware that this sort of agreement could strain personal or working relationships if things go wrong, so treat it as a last option.


A cash flow issue is stressful for any business owner. Try to take a deep breath and be reassured that there are options available. Take immediate action as soon as you notice an issue and you’ll feel better knowing you’re doing everything you can to help your business pull through.

Next steps

  • Don’t wait for a cash crunch. Fine tune and improve your business as you go.
  • Develop a cash reserve to buy you time when you need it.
  • Update your cash flow forecast to make sure you are working with fresh numbers. You’ll want to see exactly how much money your business requires to stabilize cash flow.
  • Talk openly with your accountant, lawyer and bank about your situation. Don’t hide your cash flow crunch. Chances are they’ll have solutions to help resolve your issues.

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