Handling A Cash Flow Crisis

I have been through cash flow issues over and over, so I thought I would share some of my wisdom.  I mean, where do you get cash when it seems like there are no options?

1. A cash flow issue is a problem

Consider your cash flow issue a problem and work to define what your problem actually is.  For instance, I know that I don’t receive any income until September.  What bills must be paid before then?  Perhaps you receive a variable commission and you think you’re going to be short.  Unless you can work through the numbers and find out when your problem starts and what amount will cure it, you will never be able to find a solution.

2. Planning is never perfect

While you can guess your receipts and when they will come, some may be short, some may be late, some bills may be larger, etc. so you must build in a small margin if possible.

3. Revise your plan as you get actuals

As you get receipts or pay bills, update your plan to reflect any changes.  If you fall more short than expected, you must come up with more of a solution.

4. Paying late is not the end of the world

Almost all bills can be paid a day late.  Some can be paid a month late.  Evaluate what you think you can drag your feet on and adjust your plan accordingly.  Talk with your creditors if you must and let them know what’s going on.  If you are paying significantly late, this would be a great idea.

5. Brainstorm some ideas for improving cash flow

So you’re still short?  What can you do to raise some cash?  Consider all options, even if you really don’t want to use them.  Think of ways to delay payments or quicken receipts.  Ask the bank for money.  Use factoring if possible.  Does somebody owe you money?

6. Implement your top ideas

See if your top ideas are feasible and add them to your plan.  See where you stand now.  Brainstorm again if needed.

7. Work for the long term

Once you have gotten through your crunch period, look for long-term solutions to improve your cash flow permanently.  Is your margin too low?  Are there expenses you should cut?

8. Expect the next time to be even worse

If you get through this cash flow issue and take no permanent corrections, expect next time to be worse.

Let me know if this advise works for you by commenting.

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How Cash Flow Can Get You

What would a successful business look like to you?  Would it be profitable every year, and every month?  What if I told you that you can have a profitable business that is short on cash?  Here is a good example of what it is like to have a cash flow crisis:

You take a job that pays you more than plenty enough to pay your bills, so say you make $20,000 per year and your bills are $10,000.  The only problem is that your employer will only issue you a paycheck when they have enough money to pay you.  So business is slow in January, you don’t get paid.  February is much better so they catch you up.  March is really good and they pay you on time.  April business is down so they delay paying you.  Get the picture?  So when you are caught up you have no problem paying your bills but when your employer is behind in paying you then you have a rough time paying your bills.

This example is exactly what happens during a cash flow crunch.  Generally your accounts receivable balloons and your payables are demanding attention.  If you’re like me, your payables are very small but your receivables are big… and you have to make payroll.  I am profitable each and every single month but if my client starts to slow pay, for whatever reason, then I start to feel the pressure.  The bank account dips to near zero and some important bills are just around the corner.

So why do customers pay better some times than others?  Often they are reacting to their own income and payables situation.  They are short on cash so they slow pay their vendors.  Sometimes it’s a matter of how fast paperwork moves through the organization.  Or sometimes the check is just lost in the mail.  All kinds of things happen.

What can you do to make the situation better?  When your accounts receivable (an asset) balloons, the only thing you can do is to increase your debt, sell more stock (or give yourself more money), float your accounts payable more, don’t issue payroll (owe your employees), or pay your payroll taxes on your credit card.  Perhaps you can come up with other solutions, but generally as assets increase you must increase liabilities to keep things in balance… unless of course you are high on cash.  That, my friends, is a nice problem to have but many businesses manage to retain only a bit of cash every month, much of which is taken by Uncle Sam at the end of the year.

I did apply for a business line of credit today to try to deal with the low cash situations.  Honestly, I thought I had my problem taken care of and then the check that was supposed to come this week didn’t.  It got lost or something.  So I must face reality and take some real action, not just hope for the best.  I have a week until payroll and I’m only a bit down, but then federal payroll taxes come just a bit after that.  I am concerned enough that I’m not going to get paid quick enough (because of lost check) that I had to find cash somewhere.

The worst thing about all of this is trying to explain to my wife the difference between not being profitable and having a cash flow problem.  The business of the business is being managed very well, but um just can’t make payroll, and um I need money to pay personal bills.  Crazy isn’t it?