I am no stranger to businesses with cash flow problems. The lack of cash to pay the bills is pretty common among small businesses. It’s no secret why it happens… promises haven’t been kept by customers, you expected sales that didn’t materialize, you expected funding that didn’t come in, the list goes on. What I find most often is business owners don’t know what to do when it happens to them. Here’s my advice:
1) Figure out what went wrong and take steps to fix the problem or at least limit the impact. This is easier said than done and you might need some outside advice to help you figure it out. Here are some things every business should do:
- Review your budget vs actual report – is anything out of line? (If you don’t have a budget, you need to get one. Budgets help you keep things under control and see when they aren’t)
- Review your trends – Look at your operating cash flow ratio, debt to equity, etc. What’s the trend? Is this a one month blip or has your problem been brewing for a while? (note, your financials must be accurate or your ratios mean nothing)
- Build a cash flow report. I like to use 2 cash flow reports. The first is a high level cash flow that turns the budget into a cash flow forecast so you can see potential problems with your budget and figure out how to make your plans work well in advance. The 2nd is the one you’ll need immediately. It’s a very tactical report that details out what you’re expecting in receivables over the next 4 to 8 weeks (as far out as you can accurately predict) and the bills you’ll need to pay.
2) Take a look at your tactical cash flow report. Make sure you’ve got payroll covered. If not, immediately figure out how you’re going to make payroll. Once you’re 100% satisfied you’ve made payroll, prioritize your vendor payments. Try to get an idea of when you’ll be able to pay vendors.
3) Collections. Call your clients – be persistent. ALWAYS ask for a date of when they’ll be able to pay. Offer to take payments on their account if they too are suffering cash flow issues. If you take credit cards, ask if they would like to use that option. If the client hasn’t given you a date of when they can pay, ask them when you should follow up with them. I like to suggest a date – “should I follow up with you next Tuesday?” Document the day, time, who you spoke with and mark them for follow up. Remember the squeaky wheel? It is true, persistence will pay off.
4) Vendors. Call your vendors (at least take their calls!). I know first hand that you don’t want to take those collection calls. No one does. I also know that what every vendor wants to know is that they’re important and you do want to pay them. You’re a lot less likely to be thrown into collections if you talk to your vendors, explain that you are having cash flow problems and see what they can do to work with you. Make sure to prioritize your vendors and don’t make promises you can’t keep. Being a liar will never work in your favor. If you simply can’t make any guarantees, tell them when your next decision point is. “I’ll be reviewing payables again next Tuesday, you can follow up with me on Tuesday.” Almost every business has had a time when they experienced cash flow problems. Most vendors will understand as long as you’re communicating and making an attempt to get them paid.
5) Paying the bills. When you finally have money to pay the bills, of course, pay the most important first. If you don’t have enough to pay everyone, try to share the love. You’ll be better off getting several people closer to current, than making one person completely current and avoiding the rest.
Of course, every situation is unique and I can’t possibly comment on all the possibilities for getting through a cash flow crunch. If you take nothing else from this article, take my advice on talking to your vendors. I see people make the mistake of not keeping an open and honest dialog with their vendors far too often. It’s the professional thing to do, so take those calls! You need to manage the situation; avoiding it won’t solve anything.