“Cash flow, not profits, is the lifeblood of your business. Project it, monitor it, and manage it well before serious trouble starts to brew.”

For many years, my underlying, deepest business concern was running out of cash. My businesses were almost always profitable, but they still burned cash – lots of cash. And, yes, it is very possible for a profitable business to go bankrupt because it doesn’t have the cash to pay its bills and can’t secure funding.

How can this be? In my book publishing business, we had to pay our book printers within 30 days. We would typically print enough books to last for one or two years – it was too expensive to print smaller quantities due to the high start-up costs of the printing presses. Yet bookstores and wholesalers would often take 90 days to pay us.. So as our business grew, as we published and sold more and more books, I constantly had to invest more money in book inventories and in receivables.

I did arrange bank financing after a couple years in business, but they had a different view of the process than I did. I was basically using the financing to support long-term growth. However, the bank viewed the borrowing as seasonal, meaning that they expected all borrowings to be kept fully paid off for 30 days each year. While the bank never officially called in my loan, they pressured me continually to pay it down. When I finally did pay down the credit line, they immediately shut off my line and refused to renew it.

Even if you are running a business that doesn’t burn cash for receivables or for inventory, you can still easily run out of cash. Many businesses often take longer than the owner envisioned to build sales, and start-up costs always end up being a lot more than they think. In addition, you’ve got to be able to pay for your living expenses.

Running out of cash in a new or young business isn’t something unusual. It happens all the time. So don’t be surprised if it happens to you.

If you have run out of cash, do not panic. There are many things you can do, which I will walk you through later in this presentation. But do take the situation very seriously.

If you sense that you may have cash flow problems coming, start working as soon as possible to avert them. And even if you don’t foresee any cash flow problems, you should always project your cash flow at least a year ahead, so that you can catch a problem well before it becomes more serious.

Don’t Just Add the Numbers, Manage Them

If you’re like me, before you dreamt of going into a new business you had dreams of big, fat profits. But once you got into business, you dreamt instead of positive cash flow.

Having a detailed cash-flow projection that’s updated at least once a month is crucial in controlling cash…You can’t just add up the numbers, you have to manage them. With careful management you can realize huge cash savings without changing the course of the business.

One of the first areas for saving cash that I would look at would be inventory. I’ve found that when I was running into cash shortfalls, I could cut more than $300,000 in projected inventory purchases with minimal risk of stock-outs, even when my business was only doing about $5 million a year in sales.

Payables Management Boosts Cash

Payables can be just as important as receivables in boosting cash flow.
Know the payment norm in your industry – not just the stated terms, but when suppliers actually get paid. Then delay your payments to the slow end of the accepted norm. We used to print most of our books with a firm that gave us 90-day terms. Then they installed a new CFO (chief financial officer) who insisted on faster payment. So we limited our business with them to those rare projects where their pricing was dramatically lower than their competitors.

Some suppliers offer “dating,” meaning extended terms. A few even offer outright financing. Don’t be afraid to ask your suppliers for extended terms.

The ultimate solution is to eliminate your inventory cash financing needs entirely by buying on consignment. This means that you don’t own the goods until you either sell them or use them in your manufacturing process.

For example, I used to distribute the books of smaller publishers on a consignment basis, paying them only after the books were sold.

Evaluate Your Product Mix

You can change your product mix to boost cash flow, and perhaps improve your return on investment at the same time. Consider dropping those products that tie up cash the longest and replace them with faster-moving items.

I once visited a manufacturer of high-performance powerboats. Prior to my visit, I was surprised to hear the company had discontinued the king of its fleet, a critically acclaimed 65-foot sport fishing boat. The owner’s brother explained to me that while the 65-foot yacht was selling well and had good profit margins, it tied up money for too long because of its slow, customized production process.

There are few business people who have the discipline to drop their flagship product because of a lousy return on investment. But this doesn’t mean that you can’t profit by being one of them.

Turn Assets into Cash

Of course you can always sell assets to improve your cash position.
You can sell your accounts receivable to a commercial finance firm or other third party in a transaction called factoring. It’ll usually be more expensive than traditional receivables or working capital financing, but it does create cash and cleans up your balance sheet. If you own your building, you can sell it and then lease it back. Some of the largest and richest corporations in America have done this, so why not you, too?

You can also put together a bundle of all of your used equipment, get a leasing firm to buy them and then have them lease them back to you.

Accounting rules may force you to disclose leases on your formal financial statements. But to most bankers, lease liabilities appear less onerous than traditional debt. By turning assets into cash, you may not even need to borrow at all.

Focus on the Growth Business

If you’re trying to quickly grow a small business, or if you’re in serious financial trouble, you’ll need a more extreme solution to finding more money.

You can always try to take on investors. But if your business is growing quickly, or if it’s in trouble, you’ll dilute your ownership much less if you can wait until later to do this.

What I have done to finance fast growth on several occasions is to sell a product line or a part of the business that is highly profitable, but that doesn’t have the best growth prospects. For example, I sold our small career magazine group to a subsidiary of the Washington Post Company (since renamed the Graham Holdings Company) to help finance our investment in Internet-based businesses. A steady and profitable business, the magazine group had contributed as much as 50 percent of our revenue in their early 1980s, but only about 5 percent in 1995, as our other businesses had rapidly outpaced it.

Finally, If You Have Just Totally Run out of Cash, Don’t Panic

If you have simply run out of cash, come up with a plan and a strategy. Shut the door to your office and do some deep, hard thinking. Remember there are always alternatives.

You can check out my more detailed presentations on how to handle money problems. But the first thing you want to do is to make sure that you are not paying the bills of just those vendors who are screaming at you the loudest. In fact, those may very well be the least urgent bills to pay.

You’ll need to sit down and figure out how you can squeeze as much cash as possible out of your business. Then you need to organize your bill payment: which ones you are going to pay now, which you will pay when your cash flow improves, and which you are going to allocate for payment even later.

Businesses run out of money all the time and often have to delay paying their bills, so don’t lose your cool. Don’t succumb to pressure from your vendors. Instead, create a survival plan with a cash flow projection that puts you in charge, not your screaming vendors.

Then, in future, keep that cash flow projection up to date. This will allow you to make the proactive changes in your business that are necessary to nip cash flow problems in the bud before they become serious and become a major distraction or detour for your business.