Entrepreneurs can interpret the phrase “financial crisis” in varying forms. Failing to deal with any form of financial crisis without a sound strategy can result in an unsuccessful business regardless of the products and services your company offers.
To ensure that your business can continue to deliver the necessary services it requires to succeed during a slowdown or economic recession, you must endeavor to improve cash inflows.
Finance management for small, medium, and large businesses can be challenging. It includes far more than analyzing balance sheets and profits and losses. Businesses especially need to have a comprehensive view of income sources and what influences the company, be they small or large.
It is a misconception that a financial crisis can happen only during an economic recession. In this blog, we’ll go into great detail regarding the potential causes of financial crises in business and methods to prevent them.
What Can Cause a Financial Crisis in Business?
A financial crisis occurs when a company’s acquisitions, purchases, and commodities depreciate and it fails to fulfill its debts. This typically happens when consumer demand for products or services sharply declines.
Businesses must have long-term and short-term contingency funds that can pay debts and keep them afloat during slow periods of business and when reorganizing their financial resources. During such crises, your financial and product divisions should reevaluate income streams in order to identify new business ideas that can transform the trajectory of your company by catering to your market and creating a consistent income.
Reasons for Financial Crisis
- You have outstanding monthly invoices from vendors.
- A surge in your manufacturing costs has dropped your profit margin.
- Your company’s operating expenses, including rent, insurance, service charges, administrative, marketing, and transportation costs have gone up.
- You have an unexpectedly slow sales season.
- Economic activity is slowing (stock market crash), resulting in a recession and a banking crisis.
- You lost a value investor or contract.
- You chose the incorrect time to renovate your office, hire top employees, or purchase expensive technology or equipment.
Any business action you make has the potential to boost or hinder your cash flow. The secret is to have a solid understanding of your budgeting and financial projections, which can help you put measures in place to better handle worst-case scenarios and control such crises.
What to Do During a Financial Crisis
Identify The Root Cause
Your financial crisis could be the result of internal or external factors affecting your company. For example, if a large portion of your revenue is used to cover your workspace rental, consider relocating your business or requesting that your employees work from home until your financial position improves, or if you have large payroll expenses, consult with your IT department about automating areas that can be automated. These steps can result in a drastic reduction of overhead expenses, making your cash flow stable.
Provide Discounts To Suppliers And Clients In Exchange For Early Payment Of Invoices
Collecting unpaid invoices can help you get through a tough time financially and keep your cash flow consistent. In a recession, not only is your business affected but when you’re short on cash, your suppliers and clients are too, so they’ll want to set aside money for an emergency fund. Giving your third-party partners a discount is one of the best strategies to assist them to pay their invoices while maintaining a positive relationship with your business. You can ask your contractors and customers to use credit cards to make immediate payments so as to not interfere with their operations.
Run A Surplus Sale For Your Services And Merchandise
If your sales are slow, reduce your stock by offering it at a markdown to maintain a consistent revenue stream. This will help in raising funds to manufacture your fast-moving goods while also benefiting from the sale of your slow-moving products, thereby reducing your inventory space.
Rework on Budgeting
Your budgeting process should be revised in light of the market’s current state. This will help identify areas where unnecessary expenses are occurring, thus improving your financial position.
How to Prevent a Financial Crisis
Invoice Factoring
Using invoice factoring is one of the best strategies to get through a financial crisis. Your vendors and customers may have outstanding invoices. These overdue payments can have a significant detrimental financial effect. Invoice factoring companies will provide you with an instant source of funding during a drop in sales or a financial crisis by acquiring your unpaid invoices and undertaking the responsibility of collecting payments from your clients over a period of time.
In times of financial stress, urging your vendor to pay their past-due payments will be fruitless because they will be experiencing the same difficulties as you. Invoice factoring can be a useful tool for your organization as you do not want to lose your client or supplier during such trying times, and more so when business picks up.
A healthy business must always have a consistent cash inflow. This implies that a business shouldn’t rely on payments from clients or suppliers to fund its operations. Invoice factoring is essential for maintaining working capital, expanding your business, having a contingency fund, taking on high-value contracts, as well as surviving a recession.
One of the most significant benefits of invoice factoring is that it doesn’t have high-interest rates, fees, penalties, or collateral requirements like traditional banks. Invoice factoring companies, unlike banks, also provide a fast and efficient funding process that guarantees you receive your funds precisely at the time of need. This will enable your company to concentrate even during difficult times on crucial aspects like marketing, acquiring equipment or software, and manufacturing.
Conventional Banking Financing
If you have a sound business plan, strong credit history, valuable collateral, and accurate financial projections, banks may be willing to lend you capital for your business. While banks provide programs exclusively for small businesses, it is essential to keep in mind that you must have been in operation for a certain number of years before you can apply for funding. Banks may not be the right approach if you need financing immediately.
Angel Investors or Business Partners
The right investor or business partner can introduce your company to an entirely new ecosystem of clients and vendors, which can drive profits. Although it might be difficult and time-consuming to locate the perfect partnership, a competent investor, with their industry knowledge, can not only give you financial support but also serve as a mentor to help you grow your company. A robust business plan that has a significant emphasis on financial projections will help you find an investor who specializes in your industry. Effective business alliances can improve the efficiency of your lead generation and marketing strategies while also assisting your organization in surviving a decline in profits.
Conclusion
Regardless of the size of your organization, a financial crisis phase is to be expected and inevitable. But this is a challenge that can be addressed with reliable short- and long-term strategies. Low seasons can be effectively endured without having an impact on your finances if you have consistent working capital.