Experiencing a cash flow gap is a common challenge for business owners – but it doesn't have to derail your business. Here are 5 immediate steps you can take to ensure your business stays on track.
When Henri went to collect a ₱3 million payment from a client, he was shocked to discover that the check wasn't ready. To make matters worse, the client told him they wouldn’t be able to make the payment for another week. This unexpected delay left Henri with a ₱3 million cash flow gap – and as the managing director of a facade maintenance company, it was up to him to resolve the issue in three days, so the company could meet its payroll obligations.
Sounds familiar? A cash flow gap is one of the most recurring challenges for Philippine small and medium enterprises (SMEs) – often caused by delayed payments, unexpected expenses, or an unforeseen seasonal fluctuation in business income.
Just because cash flow gaps are a recurring challenge doesn’t mean they get any less stressful for business owners like you. Fortunately, there are immediate steps you can take to address them and ensure your business stays on track.
Before diving into solutions, it's essential to grasp the meaning of cash flow. Cash flow refers to the movement of money in and out of your business. Positive cash flow means more money is coming in than going out, while negative cash flow indicates the opposite.
Effective cash flow management involves monitoring your cash flow regularly, anticipating future cash needs, and ensuring you have a backup source of financing for unexpected financial emergencies. Just like Henri, however, not everyone has the luxury of time in the case of a cash flow gap – so here are the next steps you can take to resolve it swiftly and effectively.
The first step is to analyze your current cash flow situation by reviewing your financial statements, including your cash reserves, overdue invoices, and cash tied up in work in progress. This analysis will help you achieve two crucial goals. First, you’ll determine the exact amount needed to return to a positive cash flow position. Second, you’ll identify the root causes of your cash flow issues – and see if there are solutions that don't require an immediate cash infusion.
Do you have clients with overdue invoices? Follow up on them, especially the ones with the largest amounts owed. In this case, a friendly phone call to the client may work better than sending an email or text reminder for payment. You can also negotiate a payment plan with them so they can pay part of the money owed immediately. Meanwhile, you can offer a small discount to clients with upcoming invoices to encourage them to pay earlier.
In the future, make it a point to improve your accounts receivable process by invoicing promptly, sending automated payment reminders, and having a clear payment policy to avoid confusion or delays.
If your cash flow gap is due to accounts payable, consider negotiating longer payment terms with your suppliers. Extending your payment terms can provide temporary relief and help you manage cash outflows better in the future. Make it a practice to build a strong relationship with your suppliers – it can make them more willing to accommodate your needs during challenging times.
Identify areas where you can cut costs without compromising the quality of your products or services. Review your expenses and prioritize essential spending. Consider the following cost-cutting measures:
If your cash flow gap persists, it may be time to explore financing options to bridge the gap. One effective solution is First Circle's Revolving Credit Line. This financial tool provides flexible access to funds that you can borrow to cover immediate expenses as needed. The best part is you only pay for the credit line when you use it – otherwise, you can open it and maintain it for free.
First Circle's Revolving Credit Line offers other advantages, such as:
Experiencing a cash flow gap is a common challenge for business owners – but it doesn't have to derail your business. By being proactive in analyzing your cash flow, optimizing your accounts receivable, and reducing unnecessary expenses, you can come up with solutions that do not require coming up with money upfront. And in dire cases, exploring financing options like First Circle's Revolving Credit Line can help you right the ship – just like it did for Henri, who applied for and activated his First Circle credit line in the three days before his payroll obligations were due.
Apply for a Revolving Credit Line today and get up to ₱20 million in financing.
