How to Survive a Cash Flow Crisis

Everyone knows that a business needs money to survive. However, the turbulent economic times are making it difficult for many small businesses to maintain a steady cash flow. The common practices of tracking accounts receivable and accounts payable will not be enough to combat an actual cash flow crisis. However, there are some steps that will preserve relationships with creditors and help ensure the survival of the company.

Strategy

The first step to any crisis is planning. Create a cash flow projection and develop a plan based on the information in the projection. This cash flow projection plan will resemble a business plan and should illustrate useful strategies for increasing cash flow and paying off debt.

When developing your strategy, it is also helpful to look into the financial stability of your lender. This is easier if you develop an open and honest dialogue with lenders from the beginning. If your lender is not in great economic shape, consider taking your business to a more effective venue such as a credit union.

Accounts Receivable

Before cutting costs, try to up collections. Send out invoices quickly, and offer incentives such as a two percent discount for paying the balance before the due date. Do not send invoices out on certain days; send them out as the work is completed. Follow up on any late payments, and offer to settle for a lesser amount if an extremely overdue client can pay quickly. This will eliminate the cost of using a collection agency.

Requesting a down payment upfront is a common business practice that can improve cash flow and cover the cost of materials and labor for a job. A payment plan can also build positive cash flow. For example, have a portion of the final sum paid throughout the process of the job.

If money is tight, try renegotiating contracts with vendors and lenders. At the very least, seek extensions on the timeframe of your payments. Take advantage of the maximum allowable time to pay bills. Schedule these discussions before payments become an issue. At this time be honest about the situation, but emphasize the steps you are taking to correct the problem and the positive aspects of your future projections. Be careful not to scare vendors into stopping your supplies by focusing too much on the negative aspects of your finances.

Cutting Cost

A cash flow crisis usually involves cutting costs. Do this carefully. Employee pay should be the last item on the chopping block. However, skipping bonuses and raises in a crisis is reasonable. If pay cuts are necessary, begin at the top of the ladder and not the bottom. This will show that you value your employees and build the loyalty necessary for any truly successful organization.

If layoffs are really necessary, consider reducing full-time employees to temporary part-time or freelance positions first. While not ideal, this allows to company to retain the services of specialized employees. It also provides the employees with some income. However, part-time and freelance employees will probably need to look for work elsewhere to make up for lost income, so do not take this step unless it is absolutely necessary.

Going green is another way to cut expenses. Regulate the thermostat, and turn it up in warm weather and down in cool weather when out of the office. Skip the cost of mail outs by using Internet connections, and choose conference calls or e-conferences to limit travel costs.

Increasing Cash

In the middle of a crisis, it may be necessary to have an extreme sale that will attract more customers. This should not be a standard practice, and customers should know not to expect the prices to remain this low. Liquidating the inventory will temporarily increase the cash flow, but it is important to have a strategy for replenishing the inventory.

Another quick fix to improve cash flow is last resort borrowing. Cash advances on credit cards are an option, and so taking cash distribution from an IRA. Both of these actions can have serious consequences if there is no way to pay them back in a timely manner. Cash advances usually incur higher interest rates, and the IRA is only tax-free for 60 days.

If times are desperate consider taking loans from family and friends or bringing in new investors. The situation may not be ideal, but most companies have to sacrifice to survive a cash flow crisis.

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