Cash is King - Cash Flow Basics

Did you know that according to Money magazine, growth and cash flow issues kill 25% of all small businesses? How is this possible? How can you be profitable and go bankrupt at the same time? Let me give you an example.

Your business is growing. It's exciting. You’re getting multiple clients and multiple orders for your goods or services. Then one of your customers starts slow paying you. Then another customer is having cash flow problems of their own and they start slowing their payment stream. Another customer decides to cancel an order after you have expended the costs to produce.

All of a sudden, your business is affected. You have payroll to meet, suppliers to pay. Your fixed cost aren’t changing, even though the cash isn’t coming in as quickly as anticipated. Your landlord doesn't care if cash has slowed or not. Your overseas suppliers want cash up front before your product ships. You're stuck.

Ask yourself this question. Can my business survive if I did not receive any customer payments for one month?

Years ago, I was the controller of a $18 million-dollar business. It was in a capital-intensive industry, and the company was burdened by high interest debt. As I sat in my office one day contemplating our cash flow problems, I realized that if we didn't ship any product to customers that month, we would still have to come up with $120,000 in interest payments by the end of the month. Quite startling.

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How do you survive a cash flow crunch?

1. Track your cash flow weekly. Track the payment streams of money coming in each week for the next month, against your money going out. Make sure you know the date payments are coming in. You may have to contact your customers to verify when payments will be coming. Get verbal or written commitments from your customers regarding the date of payment.

2. Secure a credit line before you need it. The old adage is “when you need the money, no one will be willing to lend.” Getting a secure line of credit, before you need the money is key. Many times, this is done by securing a portion of your Accounts Receivable against a line of credit. A secure line of credit means you only have to borrow against it if necessary.

3. Have a Rainy Day Fund. This is one of the most difficult things to anticipate when things are going well. Try and accumulate 1 month of anticipated payments in cash as a reserve. All companies large or small have cash flow problems at some point. Be prepared.

4. Fire bad clients, especially slow payers. As a small or start up business our tendency is to only say “yes” to new clients, but the reality is that some clients are difficult. If you can afford to do so, gently get rid of your slow paying clients. Say “no” to potential clients who you anticipate being slow payers. Check their credit to be sure that they can pay you on time. Do internet research to see if they are having cash flow problems or complaints from other vendors.

5. As a last resort, push out your payment to suppliers. At the previously discussed company, we came up with a payment plan and contacted each supplier. We notified them we were having cash flow problems, and if they would work with us, we would agree to pay the current invoice twice for each current invoice if they would apply the duplicate payment to their oldest invoice. 90% of the suppliers agreed to work with us and followed the payment plan.

Cash flow issues happen to the best of companies. Anticipation and preparation before you have problems are the key to surviving the inevitable cash flow crunch.