How does a short-term cash flow crisis impact a firms competitive strategy?

Having had a significant business with a short-term cash flow crisis myself, I understand fully how this can impact on its competitive strategy. So let”s take a look at how a short-term cash flow crisis impact a firms competitive strategy.

All businesses need cash to thrive, but when you take the cash away, it becomes very difficult to run any business. A cash crisis makes it difficult to pay suppliers on time. A lack of cash makes it more of a challenge to find the money to pay staff and at the end of each quarter. Plus a lack of cash makes it difficult to find money to pay HMRC the VAT.

All of these cash flow challenges take their toll on any business, but how does this impact on the competitive strategy?

Ways in which a lack of cash impact on competitive strategy

The following are ways in which a lack of cash can impact on a firms competitive strategy:

1. When a firm is in the middle of a cash crisis, this can become demoralising for staff. This can lead to key staff members leaving to go to the competition. Losing key staff can make it difficult to grow a business, as it costs plus takes time to train new staff.
2. Following on from the loss of staff in point one above, if your firm is a service business, the loss of chargeable staff will impact on your businesses service offering. Losing good staff to the competition will give them the competitive advantage over you.
3. In addition, it’s possible that your business may need to lay people off and make redundancies. This may put pressure on the other staff and this makes it more of a challenge to grow a business.
4. If the cash crisis makes it difficult to pay suppliers, this will impact on the supply of products to your customers. This will cause your customers to go elsewhere for what they need.
5. A lack of cash will limit how much the business is able to invest in new equipment to give it the competitive advantage over other businesses.
6. Where the cash crisis gets to the point where failure to pay debts as they fall due can damage the firm’s credit rating. This in turn will lead to other suppliers not being willing to offer credit to the business. From this point it could be a downward spiral into bankruptcy!

How do you manage a cash flow crisis?

If you find yourself in the middle of a cash flow crisis, there are a number of steps to take. Managing cash flow in a crisis is not easy, but taking the following steps will help:

• Adjust your business plan and prepare cash flow forecasts to review strategies to pull yourself out of the crisis.
• Look into ways to improve profit margins, or focus on your key profit drivers like your average transaction value. Focus on how you can increase your sales.
• Accelerate your customer receivables. If your customers are taking advantage of long credit terms, shortening these payment terms will impact positively on your available cash balance.
• Consider factoring your receivables to accelerate cash received.
• Negotiate with your suppliers to extend your payables. It’s much better to take longer to pay with agreement from your suppliers than to simply not pay on time and expect your suppliers to accept late payments.
• Consider your bank or other borrowing options. In order to do this, you’ll need to prepare a business plan as well as cash flow forecasts.
• Consider raising money through an investor.
• Reduce your costs and overheads.
• Consider staff redundancies.
• Sell-off your non-essential assets to generate cash.
• Reduce your stock levels down.

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