According to Business Insider, 82% of businesses fail because of cash flow problems. A cash flow shortage exists when your business has more money flowing out than coming in. If there’s no plan to deal with the shortage, it becomes a cash flow crisis. For a lot of owners, the moment it becomes real is the week there’s not enough cash in the business to pay the employees. A cash flow crisis may feel that bad, but it’s simply a cash flow problem that got out of control. Don’t panic! You are not alone in this. Now let’s take a look at the ways you might mitigate your cash flow shortage.
Your First Response to a Cash Flow Crisis
Your first response to a cash flow crisis should be to get a grip on reality. If you’re short on cash, take a close look at your business plan, your business operations and your expenses. Figure out why the shortfall occurred and whether it’ll be a recurring problem. Then, using job costing, itemize your profit and loss by job, client, employee, product, service, event and marketing strategy. See which aspects of your business are the most profitable and which are the least. Your data might reveal that one job, that product, or that marketing campaign is responsible for negative cash flow. If that is the case, it will need immediate attention. Then you can concentrate on the services that produce the most profit, cut clients who cost you more than you know, fix your pricing and eliminate waste and unnecessary costs.
Next, speed up the money coming in. How did Tesla survive a cash flow crisis? By taking pre-orders for a product before it went into production. You can improve your own receivables in other ways, too. Get a deposit or partial payment from new customers up front, instead of billing them in full for the completed work. Send every invoice immediately after you deliver, instead of batch-billing all your customers on one day of the month. On longer jobs, try billing in stages, every week or two, for the work done so far. Go through your receivables list for outstanding accounts and call those customers; ask for partial payments if you need to, because in a cash flow crisis every cent counts. Don’t send nasty letters, but don’t assume they’ll pay on their own. Offer customers more payment options, such as credit cards, mobile payments and electronic payments, since customers are more likely to pay promptly when it is easy and convenient.
The other half of the equation is the money going out. If money is tight, you can postpone payments that are owed to suppliers, vendors and service providers. You’ll want to do this without disturbing the relationship you have with the other company, so be honest about where things stand. Not every vendor will budge, but suppliers you have been loyal to are often willing to work with you if you can prove you are acting in good faith. A negotiation can help you buy yourself some time. For example, “If I delay paying you by a week or two, will you wait?” Your utility providers may also give you some leeway, and possibly even reduce what you owe.
Get Cash Flowing into Your Business
One way to get cash flowing into your business is to borrow, either through a business loan or a credit card advance. Make sure you understand the interest rates of any business debt and consider all other options first, otherwise you could just be kicking the can down the road. Whether you borrow enough to keep the lights on, or enough to get out of the hole you’ve dug, you must pay it back. And if something inside the business is causing the shortage, borrowing from a lender to solve the problem only hides that from view. The bad news for the business is that now you have to address not only the underlying problem, but also the new debt.
Another quick way to raise working capital is to sell a piece of your business. Selling equity means you bring in a new business partner, so make sure you really want or need to part with a piece of your business, and be cautious about who you choose to partner with. The pressure of a cash crisis means that you are more willing than you normally would be to work with an investor who may not be the best fit for your business. It is better to wait for the right investors that believe in your venture and understand your business model.
Then there is spending. You should always watch every dollar that leaves your account, but in a crisis you need to be especially hard on it. The first question that cash-short companies should ask is “What can we cut?” To answer it, list everything you spent money on this month. Then analyze the list, one line item at a time. Ask “Do we have to do that?” Be relentless. Keep paying for what keeps you operating and what brings in revenue, and drop the rest. For example, postpone furniture purchases or expensive office upgrades until you have surplus cash again.
You can also sell off assets the business doesn’t need. You can sell assets such as company vehicles, office furniture, equipment and anything else that isn’t essential. It’s a temporary fix, since you can only sell something once, but it can generate some cash quickly.
Prevent It from Happening in the First Place
Once you are through the immediate crisis, the work turns to prevention. The best way to handle a cash flow problem is to prevent it from happening in the first place. One of the most common business problems is running out of cash, so assume that it will happen eventually and be prepared. Make sure your income statements, balance sheets and cash flow statements are always accurate and up to date. When you know your numbers, you can tell the minute your cash flow situation starts deteriorating, or even before, and then you can act on it quickly.
If you don’t know your direct costs or the portion of indirect costs assigned to each product or service, you are probably not pricing your products or services optimally. Remember, too, that revenue is not profit. If your costs are too high or your prices too low, you’ll end up selling more and more, but not making any money doing so. Job costing shows you which clients, jobs and services have the strongest margins, so you can stop spending resources on the ones that don’t.
Watch the timing of payables and receivables. If bills go out too early and customer payments come in too slowly, that’s a recipe for a cash flow shortage. The timing of money coming in and going out needs to be in sync. This is especially true under accrual accounting, where you can run short of cash even with a healthy bottom line.
A cash flow forecast helps you see cash shortages and cash surpluses coming and plan for them. It becomes more accurate as you accumulate historical financial data. Astute business owners build a contingency cash flow plan into the annual budget: maybe a rainy day savings account, or a list of costs they could cut and assets they could sell if there’s a cash flow shortage. During the year, compare the budget to the actual numbers so you can adjust. Management accounting, using your financial reports to forecast and improve cash flow while tracking measures like days sales outstanding and profit margins, can help you avoid cash shortages altogether.
