If you are starting out undercapitalized, like most small businesses do, and if you have big growth plans, sooner or later you are going to run out of money. How severe a cash shortfall you have will be dependent on how early you realize that you have a problem, and on how rapidly and aggressively you work to correct it.
The First Thing I’d Do When Facing a Potential Cash Shortage
If you’ve faced as many looming cash shortages as I have, then just pull out your standard playbook and away you go! The first thing I do is to go through every single expense line item in the budget and see what I can totally eliminate, then I see what I can cut to shreds. Then if I’m still looking like I’m going to run out of money, I’ll go back and make even deeper cuts.
(You do have a budget because you are good manager, right? You do follow it because you manage your business well, right?)
When I make these budget cuts, I’d like to be able to see in dramatic red ink what the cuts were, maybe with a redline version if I’m doing it in a spreadsheet. But frankly, I’d probably rather print it out and take a big red marker to the hard copy, sit back on a couch with my legs propped up, and try to really creatively think of expenses I can cut and burn, before they cut and burn me!
By using a big red marker or by redlining the budget cuts, I can vividly see the changes. This way, I feel like I’m making progress. I feel I have some control over the situation, and then my confidence tends to get restored, which is very important.
A big part of getting out of cash shortages, avoiding trouble, and running a successful business is trying to feel okay about yourself and your ability to run the business even in difficult times.
Speeding Cash Inflow
The fastest ways to speed cash flow is to try to get paid more quickly. Look at all of the receivables owed to you. Determine whether or not there is some means by which you can receive payments earlier than anticipated.
Get on the phone. Use your most upbeat tone, and try a little honest begging: “We’re a little tight on cash right now, and I would greatly appreciate it if you could pay us.” If necessary, offer small discounts for faster payments or prepayments.
If you are working on custom projects for businesses or consumers, don’t hesitate to ask for progress payments, even if they weren’t part of your initial terms.
Slowing Cash Outflow
Decide how serious your situation is, then decide which bills you must pay. Remember, very few businesses of any size pay their bills within the stated terms.
If you owe a particularly large amount of money to one key supplier, be cautious. If you intend to pay some of the bills significantly late, advise it of this in advance. If you are fairly certain as to when, specifically, you will be sending payment, consider offering this information as a promise in exchange for continued credit on new purchases.
Deciding Which Creditors to Pay
Make sure that you, not your creditors, decide who gets paid and when. Don’t be pressured by phone collectors, or by the firms that complain the loudest. Pay those creditors that are most important to the continuation of your normal business operations first.
Some creditors may threaten, “We’ll be taking further action,” or “We’ll be turning your account over to a collection agency,” or “We’ll see you in court.” Don’t panic. If your account is turned over to a collection agency, this will be the least of your worries. If a creditor does take you to court, the hearing date will be months down the road.
If you don’t know when you will be able to pay a bill, don’t let a creditor push you into making a payment promise. If you renege on a payment promise, the creditor will only become more aggressive. Instead, tell creditors that you have placed them on your payment list. Assure them that you haven’t forgotten about them. Let them know they will be paid as soon as possible, but you just can’t say exactly when that will be.
Don’t forget about non-crucial suppliers, but pay these vendors only when you have the extra funds. Again, as you did with crucial creditors, prioritize and pay those suppliers whose continued services or goods are most important to the maintenance of your business.
Takeaways You Can Use
- Be ruthless with every line item in your budget!
- Be upbeat and honest when attempting to speed up receivables.
- Prioritize your creditors.