How to Survive a Cash Flow Crisis

6 smart strategies that go beyond cutting expenses.
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As a small business owner, it is imperative that you regulate your businesses cash flow.(Photo: dcwcreations/Shutterstock)

Judge Smails, played by the late Ted Knight in the movie “Caddyshack,” summed it up perfectly:

“It’s easy to grin when your ship comes in and you’ve got the stock market beat, but the man worthwhile, is the man who can smile, when his shorts are too tight in the seat.”

Tage Tracey

According to financial consultant Tage Tracey, when managing cash flow, it is important to create financial projections well in advance. (Photo: Tage Tracey)

As a small business owner, your shorts are tight when your business runs low on cash. Even if you’re turning a profit, if you run out of money to pay bills and make payroll, you’re in trouble.
Per Judge Smails, you must be able to grin and bear it — and solve the problem, pronto.

The first place most businesses tend to focus on is expense reduction. By all means, this is an effective strategy and the proper place to start. But it might not be enough.

Once you’ve “scrubbed” your P&L, the trick is to focus on “manufacturing” cash from the balance sheet and specifically, from working capital (defined as current assets and current liabilities).

Here are some helpful tips on how to increase cash balances, improve liquidity and manage through those inevitable downturns that always seem to come at the worst possible time.

Work the left side of the balance sheet

After the expense scrubbing is complete, it’s time to generate cash from current assets, including accounts receivables, inventory and prepaid expenses. Start with these three strategies.

Cut deals to get paid faster. If customers are struggling and not essential to your long-term business strategy, take a discount for immediate payment. For mission-critical customers that are financially stronger, offer them an early payment discount or entice them to forward a deposit, especially on larger orders. A word of caution: Tread carefully to avoid leading customers to believe you’re having financial difficulties.

Liquidate dogs that don’t hunt. If you have slow-moving and/or obsolete inventory, find a way to liquidate it through any number of avenues, for instance, a third party liquidator. Not only will this turn inventory into cash but it will also decrease the expenses of maintaining inventory (rent, maintenance, insurance, etc.).

Don’t prepay expenses. Avoid fronting prepayments and when possible, use available financing. For example, general liability insurance is usually prepaid for a year. Financing companies are available that will finance your premium payments over the year so you don’t have to make the entire payment upfront.

Produce cash from current liabilities

As for the right side of the balance sheet (liabilities and equity), here are three ways to produce cash by leaning on your creditors and more specifically, your vendors and suppliers.

Revise payment cycles. Revise your vendor payment cycles and policies to sneak in an extra five to ten days of payment “float.” Remember, you are your vendors’ customer, so the stronger relationships will not want to lose your business and most likely will find a way to work with you to find some added payment flexibility.

Suppliers: rack ’m & stack ’m. Rank your vendors in terms of importance to your operating stability. “A” vendors are essential and need to get paid to ensure your business operates smoothly. Working down the list, “D” and “F” vendors are not essential and can be pushed on by deferring payments until cash is available (or paying in installments). Needless to say, it’s not an ideal situation, but as the saying goes, it is what it is.

Accrued liabilities: match the cash. Almost all companies have accrued liabilities in one form or another. When possible, matching the payment of the accrued liability against the receipt of cash can improve internal cash flows. A perfect example of this relates to sales commissions or bonuses. These should be paid when the cash is received from customers, not upon customer billing.

Above all: look ahead, and communicate

Nobody wants to find themselves in a stressed financial situation. But in all of my travels, I have yet to see a business that didn’t experience, at one time or another, a cash or liquidity crisis.

There are countless ways to improve cash flow and liquidity — the ideas above just scratch the surface. But if you find yourself in a cash crunch, it is imperative to remember these two concepts when using more aggressive or unconventional methods to generate cash.

First, always develop financial projections well in advance to help spot oncoming trouble. It is much easier to deal with cash crunches when you see them coming rather than having them dropped on your lap.

Second, develop and use proactive communication strategies for customers, vendors, employees and owners. When leveraging third parties to improve available cash, clear communication often helps reduce anxiety and the worst problem of all: not knowing. Improving visibility and reducing uncertainties can be a very effective tool in working through the difficult times and saving the ultimate family jewel — your business.

Editor’s note: Tage Tracy is a financial consultant and co-author of several books including “Cash Flow for Dummies,” “Accounting All-in-One for Dummies” and “Small Business Financial Management Kit for Dummies.”

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