No business is exempt from the potential of a cash crunch. A low-cash situation can arise due to slow receivables, poor cash flow management, or any number of unforeseen circumstances. Your business could be impacted by either the issuing or receiving end of a payment process, and cash flow issues can challenge the health and sustainability of your operations. We’ve written before about cash management and cash flow forecasts, but here we’ll focus specifically on avoiding – and, if needed, pulling your business out of – a cash crunch.
Set clear terms
To maintain ample cash in the bank is a basic tenet for virtually all businesses. Still, cash shortfalls can happen more often than not, with a common cause being slow receivables. To decrease your chances of having to deal with late-paying or non-paying customers, it is crucial from the beginning of a client relationship that you establish a clear time frame in which you expect to get paid. Make this explicit in the engagement contract. Put practices in place that will flag overdue payments and follow up with late payers. It might help to offer discounts or other incentives to collect payment more quickly.
It’s possible slow receivables have caused your business to be a late-payer to another party. A defensive measure is to negotiate new terms or a temporary setup with your vendors and suppliers. Those vendors with whom you have the best relationships would be a good place to start. If you’ve built up a track record of punctual payment, they may be willing to provide extra time or agree to a specific deal for the short term. Negotiating a discount from a vendor might help offset any discounts you might be extending to your own customers.
Maintain a safety net
It would be ideal if you were never in a position to need quick cash, but you might need to borrow on a short-term basis to just hold yourself over until the next check comes in. One way to prepare for this emergency is to keep a line of credit with your bank. Consider applying for it even if you don’t currently foresee any cash problems. You don’t have to draw funds if you don’t need them, but this credit line will be good to have in case of an emergency. You’ll be paying interest only on the portion of the line of credit that you actually borrow.
Other ways of tapping into short-term financing, when your businesses may find themselves in a dry spell, include putting your receivables to work. This isn’t necessarily a cheap way to borrow, but if there are urgent payments to make – rent, payroll, etc. – then this might be a viable option for you.
Keep in mind that borrowing short-term can affect your future cash flow and long-term cash management. This means due diligence to find the most appropriate and applicable financing and a projection of future cash-flow must be part of your decision-making process.
Take advantage of technology
There are tools that can help improve cash flow management. Online accounting systems can provide greater visibility into how cash flows within a business. Implementing a vendor portal online could help cut the cash conversion cycle meaningfully by enabling real-time access to invoices and electronic payments. At the very least, billing customers electronically, rather than by mail, could reduce the time you get paid.
Avoiding a cash crunch isn’t a one-time task. A business needs to have an ongoing plan to manage its cash flow with plans squarely in place for heading off any missteps along the way. Active – and regular – monitoring and projecting of cash flow are critical practices for sound fiscal management. This can help pinpoint potential areas of concern, as well as times of highs and lows in revenue if there are any seasonal factors affecting your business. Anticipating such cyclicality can help a business find room for flexibility and avoid getting caught in cash-strapped situations.
Eric Meisner began his career as a staff auditor at Deloitte and later joined Viacom as an SEC Reporting Analyst, working on their acquisitions of Paramount and Blockbuster and their related integrations. He was hired by AT&T after the Lucent spin-off and was promoted into their Consumer Markets division where he ran a $23B consolidation, and led a cost restructuring reducing the size of the financial team from 75 employees down to 25 while increasing productivity.
During the internet boom of the late 90’s, a one-year stint at the Priceline WebHouse Club created Mr. Meisner’s love for start-up / growth companies. He joined the fractional airline start-up as their first Controller, and helped them grow their revenue to $300M. In his first role as a CFO, he helped a technology driven media company manage their overnight growth from 12 to 80 employees by building a first-class financial infrastructure with his reporting and budgeting skills, ability to obtain a credit facility during the 2008 recession, and automation of the billing process. He was also the CFO of a privately held, PE backed roll-up of clinical service providers, where he was involved with M&A, due diligence, and several integrations.
Eric joins The CEO’s Right Hand as Partner after previously launching Fractional Finance, LLC in 2016. Together they merged to provide small and middle market companies with CFO services on a fractional basis.
Mr. Meisner received an MBA in Financial Management from Iona College as a member of Beta Gamma Sigma and a Bachelor of Arts in Accounting from the University of Massachusetts.