Advice & Assistance
Ways to Get Through a Cash
Nearly every small business will face
a cash flow crunch at some point, when money flowing into your company
is not enough to cover short-term payables. It can be triggered by any
number of factors — seasonal business fluctuations, late paying
customers, or the loss of a key contract. While many people associate
cash flow problems with declining sales, a crunch can even come through
rapid growth, as companies need to pay for inventory or salaries while
waiting for customer payments.
Regardless of the cause, a cash
crunch has the potential to cripple a small business. But it doesn't
have to. You can get your business ready to weather a short-term crunch
— and help ensure its long-term survival — by using the following
The easiest way to reduce the impact
of a cash flow crisis is to prepare for it before it hits.
I know, easier
said than done. But for companies who have aa written business plan,
this step is easier.
business owners need to monitor their companies' finances constantly.
Run financial forecasts at least quarterly, estimating sales and
expenses, then modifying them as your receivables or payables change.
Consider best-case, worst-case, and most-likely scenarios, using the
budget that most closely resembles the current state of your finances.
This may allow you to catch a cash flow dip and take actions to correct
it before it becomes a full-fledged crisis.
Call in the reserves
Have back-up finances at your
disposal to help you handle a cash flow crunch when it arrives. Many
businesses use a revolving line of credit from a lender or bank, which
makes short-term funds available on an as-needed basis. This allows a
company to borrow money for a matter of days or weeks, and pay it back
when promised receivables arrive. Other companies set aside funds in an
interest-bearing "rainy-day" account that they can draw on in an
emergency. In both cases, these reserves need to be set up before
Finance against your assets
It may be possible to locate
short-term capital from a commercial finance company by securing a loan
with certain kinds of assets. Accounts receivable financing allows you
to use your billings as loan collateral. As you collect this income, you
use the proceeds to repay the debt. Inventory financing uses your
product inventory as collateral — the more salable or "merchantable"
your inventory, the more likely a lender will accept it as security.
While both of these financing methods can get your business over a
cash-crunch hump, they do carry significant risk. Failure to repay the
loan can result in the financier seizing receivables (potentially
damaging client relationships) or inventory.
Extend your payments
Companies that have a track record
for paying on time might want to consider negotiating with vendors to
revise payment terms. If your company is prone to seasonal fluctuations,
you can request an extended payment arrangement at the time of purchase.
By building up a reliable payment history, you will be in a better
position with your suppliers to make this request, since you will have
proven to be a dependable, credible customer. To build a positive
payment record, be sure to pay bills early or on time during cash-rich
Once your company has made it through
a crunch and gotten more control over its cash flow, it is time to take
steps to prevent it from happening again. Look for ways to build up
reserves and put your business in a stronger financial position. Review
expenses to plug cash-consuming, profit-reducing leaks. Attack the top
cash drains mercilessly to cut operating costs. Review your pricing
structure to ensure it provides enough profit, and examine your customer
base to locate clients that pay promptly and find ways to encourage
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