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Tips on How to Avoid a Business Financial Crisis

  • Highlights

  • Assess current cash flow and forecast future requirements

  • Manage stock like a pro

  • Avoid overdue bills

  • Plan external sources of business finance in advance

Ensuring that your business stays financially healthy puts it on a faster path towards growth and attracts investors too. But, a small business may be prone to facing a monetary crisis if you don’t keep watch on certain essentials factors.

Here are a few tips on how your business can avoid a financial crisis.

1. Assess current cash flow and forecast future requirements
Be constantly aware of the current cash flow of your business. This involves tallying cash inflows against cash outflows. For example, if you have a phone cover manufacturing outfit, you can rent a shop space that you own. The monthly rent that you receive will count as a cash inflow.

On the other hand, the salaries, raw materials and other fixed expenses that you pay on a monthly basis will count as cash outflows. Assessing this will give you insights into your firm’s predicted revenue and cost. This exercise will also highlight areas that need improvement—such as faster collection of dues. If you see your working capital unable to support your expenses, this exercise of monitoring cash flow will alert you in advance. When you let your working capital decrease month by month without correcting the problem, your business may soon face a crisis. When you can predict any such gaps in cash flow, you have the time to arrange for a convenient source of finances such as a working capital loan or a business loan.

2. Manage stock like a pro

For most businesses, there are certain seasons when demand higher than usual. For your phone cover manufacturing company, this could be when online shopping platforms host sales. To meet the increased demand, you will need to manage your inventory efficiently. Adjusting stocks according to demand can also help you reduce inventory costs. For example, if you have a Star Wars themed collection, it is likely to do better when a Star Wars movie is up for release the following month. Hence, marketing this range during this period will ensure that your inventory moves fast and generates revenues.

Additional Read: Inventory Management Techniques to Save Money

3. Avoid overdue bills

Outstanding payments to creditors and vendors or suppliers can lead to a cash deficit. It can also culminate in hefty fines. So, when you receive money, make it a priority to repay due or overdue bills and then pump the money back into your business.For example, if you have to repay the vendor who supplies silicon for mobile covers within 45 days of delivery, ensure that you make this payment first, as soon as you receive money from retailers. If you default often, your supplier may demand part payment when you place the order, or payment on delivery. You want to avoid both these situations to keep your business cash flow strong.

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4. Plan external sources of business finance in advance

As a phone cover manufacturer, you may come across several situations where you need external finance. For example, to meet greater demand when mobile phones go on sale, you will have to add another shift to double the production. You may also want to diversify and add other accessories, such as earphones, to your range. Setting up a new vertical involves several new costs too.

These include testing the earphones, hiring a designer and creating a marketing plan for the product launch. In such cases, you need a flexible source of finance that allows you to borrow money as and when the need arises. This is because the cost of adding a new product to a business can be unpredictable and staggered. This is when you can consider the convenience of a Flexi Business Loan.

5. Be strategic about business spends

Often, you may find yourself spending on things that would benefit your firm in the long run. Evaluate these long-term gains against your current cash flows and go ahead only if your business can afford it. As a manufacturer of phone covers,for example, you don't want to let go of a growth opportunity, especially if it involves giving your sales a boost. But, when you spend to cater to situations such as seasonal demand, proceed with caution.For example, to produce more covers during sales, you buy can more machinery or you can add an early morning shift. The former makes sense only if you foresee an increase in sales in the following financial year. If you buy machinery that will only be in use during peak demand periods, itwill lie idle for the rest of the year. This will result in money down the drain. In this scenario, adding another shift will get the job done and proves to be a more cost-effective option. So, you should avoid any expenses that do not serve your firm’s long-term objectives.

Additional Read: Impact of GST on Working Capital for Businesses

6. Recognise the signs and tackle gaps before they widen

It is important that you tackle signs of financial distress before they escalate into bigger problems. Things that you should keep an eye open for include a decline in sales, stagnant customer reach and high employee turnover.When these signs appear, come up with strategies that nip them in the bud.For example, you notice that your basic collection does well, but your range of pop culture-themed phone covers has very few takers. So, you must approach this problem with a two-pronged approach to make sure that a decline in sales doesn’t cripple your business. First, come up with an aggressive marketing strategy to market the products that aren’t doing too well and revisit the pricing. Second, go back to the drawing board, re-work the designs and make the final product look as attractive to your target audience as possible. This will help grab the attention of the customer, and remedy the decline in interest.

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