You're facing a cash flow crunch. How can you ensure essential operations continue by prioritizing expenses?

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When your business is facing a cash flow crunch, it's like navigating a ship through stormy waters. Your immediate goal is to keep the vessel afloat, which means ensuring your essential operations continue without interruption. It's a daunting task, but with strategic financial management, you can prioritize your expenses to maintain stability. This involves a careful analysis of your financial statements, identifying which costs are crucial for day-to-day operations and which can be deferred, renegotiated, or cut entirely. By focusing on preserving core functions, you can steer your business through the turbulent times and emerge ready to capitalize on calmer seas ahead.

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1 Assess Needs

To navigate a cash flow crunch, start by assessing your business's immediate operational needs. Identify the expenses that are absolutely necessary to keep your business running on a day-to-day basis. These typically include rent or mortgage payments, utility bills, payroll, and any raw materials or inventory essential for production. It's crucial to differentiate between what's necessary and what's nice to have. Prioritizing these expenses ensures that your resources are allocated to maintain critical business functions and prevent a complete halt in operations.

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Ciaran O'Donnell

I get CEOs of fast growth start-ups on top of their finances. FD/CFO of the Year at the British Accountancy Awards | Follow me if you want to own your numbers
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For most businesses, the main overhead will be people (i.e. employees and/or contractors), often 75-80% of cost base. That comes with obligations (e.g. getting through payroll, paying contractors). Your team are also going to be key to trade through the ups and the downs. The good thing is you know (a) what the recurring cost will be, and (b) you've got the right people in the right roles to support customer/key functions.

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2 Review Contracts

Reviewing contracts is an essential step in managing cash flow. You should look at service agreements, leases, and supplier contracts to identify any potential for cost savings. Negotiate with vendors for better terms, such as extended payment periods or discounts for prompt payments. Sometimes, you may find that certain services can be temporarily suspended without significantly impacting your operations. This step is not about cutting corners but ensuring that every dollar spent is truly necessary and contributes to keeping the core of your business intact.

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Ciaran O'Donnell

I get CEOs of fast growth start-ups on top of their finances. FD/CFO of the Year at the British Accountancy Awards | Follow me if you want to own your numbers
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Cost control isnt just something for the Finance Function. All people in the business are cost controllers - and the simple check can flag the value that spend brings. Whether people, office related, marketing, IT subscriptions, professional fees, etc. Anything that doesnt tick the value-for-money box can be turned off. It's a recurring process, not just something to do during a cashflow pinch.

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3 Delay Payments

In a cash flow crunch, delaying non-essential payments can provide temporary relief. Communicate with creditors to seek extensions or payment plans for debts that are not critical to immediate operations. It's important to approach these negotiations with transparency and a clear plan for eventual payment. Prioritizing essential expenses while deferring others can help you manage cash outflow and keep the business running during tough financial periods.

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Ciaran O'Donnell

I get CEOs of fast growth start-ups on top of their finances. FD/CFO of the Year at the British Accountancy Awards | Follow me if you want to own your numbers
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Before not paying suppliers, it's worth knowing how long the cashflow dip is. Just 7 days or much longer? Having a clean balance sheet can make it easier to then see which suppliers can be 'leaned on' and for how long. For example, delaying a payment run by 7-10 days is likely to be widely accepted. However, the longer (or deeper) the cashflow dip or pinch, the less appropriate it is to lean up suppliers and structure financing options should be considered.

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4 Cut Costs

Cost-cutting is inevitable when cash flow tightens. Scrutinize every expense line item to see where you can reduce costs without compromising the quality of your product or service. Sometimes, this might mean downsizing office space, reducing marketing expenses, or eliminating non-essential perks and bonuses. Remember, the goal is to preserve cash for essential operations, so be judicious about where to scale back spending.

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Ciaran O'Donnell

I get CEOs of fast growth start-ups on top of their finances. FD/CFO of the Year at the British Accountancy Awards | Follow me if you want to own your numbers
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Cost cutting isnt always inevitable when cash flow tightens. You can be profitable and still experience a cash squeeze. However, knowing the difference can ensure you don't self-harm and cut the wrong costs. Knowing your cost stack is important and cutting costs which dont add any/enough value.

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5 Increase Inflow

While trimming expenses is important, finding ways to increase cash inflow should also be a priority. This might involve ramping up collections efforts on outstanding invoices or offering discounts to customers for early payment. Consider whether you can generate revenue quickly by selling off unused assets or inventory. Increasing cash inflow, even by a small margin, can provide the cushion needed to fund essential operations and ease the cash flow crunch.

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Ciaran O'Donnell

I get CEOs of fast growth start-ups on top of their finances. FD/CFO of the Year at the British Accountancy Awards | Follow me if you want to own your numbers
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Increasing inflow can come simply by timing - e.g. your customers pay you before you pay suppliers, holding low/efficient stock levels, being profitable, etc. The more time or warning you have about a forthcoming cashflow squeeze will give you more options and time to plan how (much) action you will need to take to get through it - whether simply managing your working capital better or consider a structured finance product (from invoice financing, a director loan, a term loan, etc.)

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6 Monitor Regularly

Finally, in a cash flow crisis, it's imperative to monitor your financial position regularly. This means keeping a close eye on cash inflows and outflows and updating cash flow projections frequently. By doing so, you'll be better equipped to make informed decisions quickly and adjust your expense prioritization as necessary. Regular monitoring helps you stay one step ahead, ensuring that essential operations continue smoothly despite financial challenges.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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You're facing a cash flow crunch. How can you ensure essential operations continue by prioritizing expenses?

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1 Assess Needs

2 Review Contracts

3 Delay Payments

4 Cut Costs

5 Increase Inflow

6 Monitor Regularly

7 Here’s what else to consider

Financial Management

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