How to Manage a Cash Crisis

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There are many reasons why small businesses experience sudden cash flow crunches. A (usually) reliable customer might take longer to pay than anticipated. Essential gear breaks down and you must pay to replace it. Or, if your business is new, it could simply be taking longer than expected to turn a profit.

How to manage a cash crisis

Figure out the cause of your crunch and take action

Identify the reason for your cash crisis and move quickly to address it:

  • A major customer hasn’t paid on time.

Implement stricter credit control and better debt collection procedures. Contact them to ensure you have the right purchase order and the invoice has been sent to the right person. Check if your contact has gone on vacation and forgotten to process your invoice.

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

Try and source less expensive materials or supplies or decide if you need to raise your price.  Monitor your gross profit margin for any further profit slippage.

  • Your business overheads have increased.

Identify specific expenses and see how you can reduce them. Regularly monitor your net profit margins to spot any out-of-proportion increases so you can take action.

  • Your business is growing 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 growth to avoid failure.

  • 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 still viable.

There may be other causes such as the loss of a major contract or you bought a large asset at the wrong time and you now need that cash reserve for working capital. In each case, understand the cause and the action you’re taking to avoid repeating the crisis, such as diversifying your customer base or using your cash flow forecasts to time purchases more appropriately.

Try to be paid on the spot

Finding money in a cash crunch

If you do find yourself in a cash crisis, there are a number of funding options to consider, ranging from self-financing or bank loans to finding a business partner. The relative attractiveness of each option will depend on the size of your cash flow shortfall and how long you’re likely to need the cash. Talk to your accountant, tax advisor or legal counsel for advice.

Explore these sources of internal funds

Before you look for external sources of funding however, can you free up cash from within your business? For example:

  • 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 a credit or give you longer credit terms.
  • Sell under-used assets and rent the equipment instead.
  • Downgrade or sell vehicles and lease them back instead.
  • Reduce your drawings from the business until revenues improve.
  • Your accountant and advisors may be able to suggest other ways to release the locked-up cash in your business.

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 to tide you over. If you’re going to need quite a lot more money, you’ll likely have to present a more detailed business plan and financial forecasts.

Invoice factoring

Factoring involves selling your invoices for immediate cash. Factoring companies may take 5% or more of the value of your invoice. The factoring company will collect 100% payment from your customer when the invoice comes due.

Taking on partners and investors

A business partner might be a source of quick cash. 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.

Family and friends

You could ask family, friends or business colleagues to help out with a temporary or longer-term loan. It’s best to put the agreement in writing and get everyone to sign it, so that both sides are clear on what has been agreed. 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 crisis is stressful for any business owner. Take a deep breath, and be reassured that you do have many options available to you. You’ll feel better about your situation when you take immediate steps to pull your business through what will surely be a short-term cash flow crunch.  

Next steps

  • Contact one of our friendly Business Relationship Managers to see how we can help your business.
  • 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 banker about your situation. Don’t hide your cash flow crunch. Chances are, your banker will have solutions to suggest to you.


Additional Resources


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