When cash flow comes under pressure, many businesse owners look to cut spend wherever possible to help weather the storm. The problem, however, is if you start making cuts in the wrong areas you’ll find yourself out of business even quicker than if you hadn’t.
Businesses struggle with cash flow for a number of reasons; slow paying customers, increased staff turnover, seasonal trading fluctuations or a change in sales. While tightening of cash flow can stifle a business's growth, it’s often the measures that are taken in response which can have the bigger impact and, in more cases than not, will sound their death knell.
In my experience, business owners who panic about their cash flow will usually start with the following cuts, which is what you want to avoid.
cutting manufacturing costs
This is a nice way of making their product or service cheaper. This is usually the biggest and worst mistake you can make. I’ve seen it time and time again, where a business starts thinking the most cost-effective way to improve cash flow is by increasing margins, usually by using lower cost materials to manufacture or outsourcing the work overseas with less focus on quality control. This is the absolute worst mistake you can make and will almost always lose you more business than it ever makes up for in savings.
Stand by the quality of your product or your service, if you don’t, your customers won’t stand by you.
skipping scheduled maintenance
Whilst pushing out scheduled maintenance on equipment might seem like a good way to cut costs, the disruptions it can cause are significant when that equipment encounters problems or at worst needs to be replaced. This can lead to lost work, lost customers and disruptions to not only your supply chain but also your sales.
marketing gets the boot
A lot of people think of marketing as a luxury or an extra that should only be accommodated when there is plenty of surplus cash. This isn’t the case. Marketing is a vital part of growing your business and shouldn’t be cut at the first sign of trouble. Maintaining your marketing presence is a must do, even when things are tight. It doesn’t need to be a full-on, multi-platform campaign that costs hundreds of thousands of dollars, but a presence is critical.
looking for quick fix solutions
Quick fix solutions don’t work. They might patch a hole for a little while, but in the end, you’ll wish you invested the time and the money just fixing the problem properly. There are serious, long term cost cutting strategies that you can implement if the cash flow issues turn out to be more than a rough patch. However, it is almost always better to try to see if there is a growth strategy that could be more than beneficial.
When your cash flow comes under pressure, cutting costs should be your last resort. There are numerous initiatives you can undertake to improve your cash flow before cutting corners and potentially damaging your business. Our Growth Manager, David Webster, put together a guide of practical tips that you can read here.
The other option to consider is to seek out financing to cover the gaps. The number one consideration with any funding you look to do should be that it ends up helping your business. This means not over-leveraging yourself to the point the debt exacerbates the problem.
Invoice finance can be a good option in these circumstances as you can only fund an amount that is already owed to your business. Cutting corners should be a last resort, and it’s important to ensure any cuts do not affect your product quality or ability to supply your customers.