Managing the Cash Flow Crunch of Business Growth

Businesses in a heavy growth phase may experience an extreme cash crunch due to ever increasing demands of a growing enterprise. 

Cash flow is vital but how to control it?
1. If you extend credit, be sure to monitor accounts receivable regularly. Have a person who is dedicated to watching the A/R at least on a weekly basis. If necessary, tighten the credit policy based on a customers’ history. It’s far better to lose a sale then to not get paid for service or product already delivered.
2. Avoid auto pay for bill payments. It can be easy and tempting to set up all of your bills on auto pay but what happens when you fall a little short of cash one month? Yep, everything either bounces or you rack up hundreds in overdraft fees. A better idea, use the on-line bill payment features but you decide when it gets deducted. This allows you to pay things slightly late if you have to but avoid bank fees that can overdraw your bank account quickly. In some cases the late fee for the bill you had on auto pay is lower than the overdraft charge.
3. If you are not able to pay a bill, it’s best to contact your creditors and be honest and up front with them. Avoiding their calls and letters is provoking and can result in more late fees or legal action. Dealing with the issue pro-actively helps in preserving your future credit and your vendor relationships. This advice rings especially true if you owe any back taxes. Call or write the tax agency without delay to make a payment plan and let them know you are not evading your payments.
4. Know what your break even point is for cash flow. Do you know what your minimum monthly cash requirements are to meet basic operating expenses and debt payments? If you don’t meet the minimum, how will the shortfall be met? Answering these questions is an absolute necessity.
5. If cash flow is volatile, keep your payments flexible. It may not be best to sign up for any long-term contracts or leases if you can’t project solid cash flow in the near future.
6. Have a contingency plan for each stage of your business. If sales are x, then we will do y. Keep the plan flexible and be aware of your situation at all times.

7. Stop the money leaks in your business.  Even when you’re flush with cash, build good management practices by monitoring and eliminating wasteful spending. 

Cash flow is the life blood of any business and needs constant monitoring and attention. This is particularly true during high cash flow seasons as well. The biggest cash flow problems I’ve seen have been businesses that have a lot of cash, get complacent, then end up in a crunch because of poor or no planning. 

Read about stopping the “money leaks” in your business and Download a free report for more tips. 

20 Reasons your business will fail and 10 why it may not: #1 Cash Flow

This is the first in a series of posts that are designed to help business owner’s make better decisions. I truly believe that everything decision you make impacts the company’s success.

Reason #1 Your small business will fail: Not having enough cash to make it through the start-up period, a downturn or to handle a surge in business. This is the number one reason most businesses fail. Cash is king as you’ve quickly learned or are about to. This can be especially tricky if you are starting a new business or have no credit.

What can you do about it?

  1. Start with a budget and a plan, you need to know what your cash needs are on a weekly, monthly and yearly basis. Does your business generate enough cash to operate or do you need additional funding. Too many entrepreneurs get in way over their heads without a good plan.
  2. Download my cash flow spreadsheet and use it daily. However, this doesn’t work if you don’t have an up to date check register. You have to know where your bank balance is at all times. And this doesn’t mean checking your on-line balance every day to see what bounced and what didn’t. You need a foolproof system to make sure you track every single dollar coming in or out of the bank account.
  3. Learn how to leverage cash. Even if you have no credit you can leverage your cash to make it last longer. For example, you may be able to stretch some things out like payroll. If you are paying your employees every week, you may get a reprieve by paying every two weeks. There are lots of strategies you can employ to use your cash wisely and keep moving ahead. See what you can stretch out.
  4. Consider getting a loan from non-traditional sources. Let’s face it banks aren’t giving out loans like they used to, this means you have to find other funding sources. Look into grants or private loans. Do the research and find the cash you need. There are lots of pitfalls here, when you find a source of funding, talk to an unbiased third-party to get another opinion. Loans or investments from family or friends can seem like your wishes have been answered, but can quickly sour the relationship.
  5. Stop buying “things” for your business. If something isn’t generating more business or required to service your clients, you do not need it, do not buy it. Be tough with yourself on this point. We all buy a LOT of things we don’t need, because it’s a write off, because it would be cool to have or because someone has convinced us we can’t live without it. Make this rule: Everything over $500 requires a night to sleep on it before purchase. Impulse buys account for much of our wasted money. Be brutal! If you are especially in financial straits stop the spending, period.
  6. No, don’t pay yourself first. Pay employees and taxes first, pay your vendors second then pay yourself when your company (and you) have earned it.  If you don’t have enough cash to cover employees and vendors you don’t have enough cash for you. This is all part of planning your business cash flow.

Manage cash like a beast and account for it all properly. Failure to get this under control can have detrimental consequences to your business and your personal life. Think you’re out of the woods because you got a loan? Now you have to be even more diligent about controlling costs and tracking it all.