Today’s guest blog post comes from Dennis Purvine of CFO Selections, a company offering interim CFO services to businesses.
Unless you have been hiding under a rock, you know our economy is still struggling. As a result, many businesses are strapped for cash. This is particularly true for small businesses, which haven’t had government largesse to fall back on the way some of the big guys have.
Cash flow is the lifeblood of business. When its flow is restricted, bad things happen:
All management efforts focus on chasing cash and finding a way to pay bills, leaving no time to actually run the business.
- Can’t pay for advertising to promote the business for growth.
- Can’t make necessary improvements in equipment and facilities.
- Can’t buy or stock more inventory.
- Can’t pay bills in a timely fashion, losing early-pay discounts or, worse, having vendors demand payment up front.
- Can’t hire new staff.
- Have to lay off current staff.
- Can’t pay the owner’s salary!
Positive cash flow (when cash receipts exceed cash disbursements) allows effective business operations, including expansion and growth. The business owner can put his or her efforts and energies into running the business without having to spend time worrying about cash flow. In short, the business owner can focus on growth rather than just chasing dollars.
So, especially during tough economic times, how do you address cash flow problems? What should you consider if your company is short of cash? The answer depends on how much cash you need and how soon you need it. Begin by considering the following:
- Increase collection efforts on past due accounts receivable.
- Try to negotiate longer payment terms with your suppliers and vendors.
- Look at your expenses and identify those you can reduce or suspend temporarily, without hurting operations. Be thoughtful and reasonable, avoiding the knee jerk reactions that could hurt your recovery.
- Talk to your banker about a loan. (Hopefully, you already have a good relationship with a banker. The best time to establish one is BEFORE you need money!) Don’t wait too long! If your company is in really poor financial health, banks may be reluctant to take the risk.
- Explore other possible sources of funds, such as corporate officers, shareholders, family members and friends.
Most businesses experience negative cash flow at one time or another. The key here is to pro actively monitor and project cash flow and, if at all possible, have a line of credit available to tide the company over the rough spots. When you spot an upcoming problem, take immediate action. Ignoring the issue is not a valid business strategy and could risk your business. On a more positive note, a company with well managed, positive cash flow when times are tough may actually have a leg up on its competition!