How to Keep a Cash Crunch From Killing Your Business
Many otherwise successful businesses fail because they can’t meet their short-term cash needs. This includes 29 percent of startups who fail during cash crunches — many of whom were profitable or seeing strong growth. To avoid finding yourself in the same situation, take the following steps.
1. Ignore Profits
The first thing you need to do is forget your profit and loss statement. It has nothing to do with whether you have cash coming in.
A profitable business may have accrual sales on the books that won’t turn into cash until it’s months too late. An unprofitable new business that’s growing smart with wise investments could have more cash than it needs.
The only thing that will let you know if you’ll have enough cash in the bank is your statement of cash flows and cash flow forecasts.
2. Shorten Receivables
When you see a cash pinch coming, the easiest step to take is to shorten your receivables. This starts with polite payment due date reminder calls coupled with an offer to take payment over the phone.
Next, get to work on any past due accounts and other customers you know pay inconsistently. Begin the process of more aggressive collections, and/or plan to do without the cash in the near future.
To get payments coming in faster, you can offer discounts on outstanding invoices or for future orders in exchange for immediate payment.
3. Extend Payables
At the same time you’re trying to get customers to pay you faster, it’s time to pay your vendors a little slower. If you aren’t already, stretch all of your outstanding payments out until their due date.
If you’re currently taking advantage of early payment discounts, consider delaying those payments until the regular payment deadline as well. The cost of temporarily giving up a 1 to 2 percent discount may be less than your other financing costs or lost opportunities.
As a last resort, weigh the costs and benefits of paying late. This includes both potential late fees as well as potential damage to your relationships with those vendors.
4. Liquidate Unused Assets
A cash crunch is also a good time to evaluate whether you really need unused assets that are sitting around your warehouse.
The easiest place to start is unsold inventory. Many business owners hang on to inventory that never sold or is an unreasonably slow seller in hopes that demand will improve. However, the benefit your business will gain from selling at clearance sale prices now is more than the small potential of selling for more in the future.
Next, consider obsolete and underused equipment. If the reason you still have it is because you might need it or use it every once in a while, it’s time to sell. The immediate cash plus freed-up productive space is worth more to you than possibly having to temporarily rent that equipment in the future.
5. Don’t Be Afraid to Borrow
Another area where business owners might be too cautious is in taking on debt. This comes from a personal-finance mentality that all debt is bad.
In the business world, all debt is good as long as your added profits at least cover the interest costs. Even when you’re able to manage a cash crisis without debt by tightening your belt, the cutbacks will often set back your profits or slow your growth.
Having an open line of credit or working capital loan can help you to quickly take on smart debt when you have more opportunities than your current available cash can handle. All you need to do is compare your expected profits against the borrowing costs.
To learn more about your financing options or how to manage your cash flows, contact Merchant Capital Source today.