Your checking account is overdrawn and all of your credit accounts are at their limits! Uncle Sam came knocking at the door wanting his fair share, you had to buy some expensive software to do a big job for a client (which you won’t bill for another month), you’re still waiting for payments on two big completed jobs … and all that leaves you with NO MONEY! Come Friday you need to have enough to cover payroll and that’s a big nut.
This has happened before. There were times when your business ran short on cash, you just skimped on your own check, and made some vendors wait. But this time, there’s no money to pay ANYONE. What do you do?
First of all, don’t panic – but we do need to take a serious look at this situation. Is this the first time it’s happened? Does this happen all the time?
If this is a recurring theme, if you are barely squeaking by each and every pay period then something is terribly wrong – and it needs to be fixed PRONTO. The stress that this is putting you under and the time and efforts you are using to manage your cash are killing you and your business. Think of where your business could be if all that effort went into productive activities?
Here’s what you do to right the ship quickly.
The quickest and easiest source of cash is to collect payments from your customers. Call every customer who is even one day late on their payments and check to determine why the payment is late. Sometimes they might be holding the payment because they are disputing some portion of the bill. Fine — can you pay the part that’s not in dispute and we can continue working on the rest? For others, they might be short on cash and they are paying only those vendors who are calling and collecting — so be that someone! Of course you should be doing this regularly, and not just when you are short of cash, but we can get to that later.
- Conserve cash.
Hold on to any cash you can. Don’t pay bills (even if they are due) until you’ve covered your payroll. This goes for personal spending as well as business spending. Hold on to your cash.
- Build a cash flow forecasting tool.
You need a tool to keep an eye on this for a couple of months until the crisis is over. Work with your bookkeeper, accountant or banker to build a spreadsheet that you can use to project your cash flow at least 60, preferably 90 days into the future.
- Be honest with people.
No one wants to tell your vendors or employees that you are low on cash — but they are going to find out sooner or later. Be honest with people. Go to your employees and let them know that paychecks might be late — you’ve got a cash flow forecasting tool to tell you how late. Same with vendors — call them and let them know that your payment is delayed but you’ll have it to them on a particular date. This makes it possible for you to start right away keeping promises (even though you just broke one). This is not a time to bury your head in the sand.
You need to manage your way through the crisis, but you’ve got a bigger issue. You have a business that’s running out of cash. If you are experiencing rapid growth, that might be your problem. Growing companies frequently run out of cash even when they are healthy. If you are growing quickly then your receivables may grow faster than your payables and even though your business is growing and doing well all that money you are loaning to your customers is making you broke! You may need to slow down your growth (so that your profits can fund your receivables), or find some additional capital to fund your receivables.
Here are some practical steps to get your business back on the right road.
- Raise prices.
I know this is counter intuitive. You need cash, so your instinct is to lower prices and get anything in the door that you can. But that just exacerbates the problem. More work at a low margin creates higher receivables, without the margin to fund those receivables. You need high margin work that will provide the profits you need to fund your receivables. Growth is actually your enemy when you are short of cash. You need to slow your growth and increase your margins to get out of this hole.
- Cut costs.
You may not be spending extravagantly, but there are likely some places where you can cut costs. Have someone else, your accountant, or another business owner, help you to look at each expense (I usually use the vendor list and go line-by-line) to see what can be cut. No sacred cows. We need to preserve cash.
- Adjust your terms.
When cash is tight you just can’t take on any business that doesn’t have a significant down payment (50% of the project at least). Then for the subsequent payments negotiate for progress payments due on a certain date (not billed on a date, due net 30). Any new work needs to have accelerated terms. Once you’ve started bringing in new business this way — keep it up.
People can’t live without air; businesses can’t live without cash. How are you going to change what you are doing in order to ensure that you maintain surplus cash?