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Growing
businesses 'burn' cash. Running out of cash is the most
common reason that businesses fail.
Cash flow crunches are almost inevitable in a growing business.
It's an easy trap to fall into.
Here are a couple of examples of how it happens:
Expansion in anticipation of increasing revenues.
Buying equipment, increasing advertising, hiring
people, building inventory - in anticipation of increasing
revenue can quickly cause a cash crunch. If revenues don't
increase, expenses overtake revenues.
Accounts Receivable.
Late paying customers can throw a business into a cash
crunch. It's important to monitor payments and follow
up promptly when payment is not received on time. Finding
out that a customer for whom you've just done a large
project has gone into bankruptcy is bad news.
Under-estimating cash needed to
pay taxes.
The tax authorities expect to be paid on time and in full.
It's important as your business grows to stay aware of,
and reserve funds for, the timely payment of taxes (sales,
payroll, & income taxes).
Here are some suggestions to smooth out the cash flow for
your business:
Plan ahead, use budgets & projections.
It's important to have a plan that shows your REALISTIC
projections for revenues and expenses on a monthly basis
for the year. Be sure to include expenses that occur annually
or quarterly such as taxes and insurance. Revenue projections
should take into account seasonal or cyclical changes.
It's safer to under-estimate revenue and over-estimate expenses.
From this conservative plan, you make some more 'upside'
and 'downside' projections. What if revenue is greater,
how would I expand? What if revenue is less, how would I cover the shortfall?
Accelerate receipt of cash.
Ask for deposits or payment up-front. Accept credit
cards. Insist on 'payment on delivery.' Invoice promptly.
Offer incentives for prompt payment (e.g., 2% discount
if paid within 10 days). Be cautious about extending credit.
Check credit history.
Keep a
cash cushion.
It's important to have cash reserves to fall back on.
Some businesses try to maintain 45 days of working capital.
(That is, sufficient cash resources to cover 45 days of
expenses).
Establishing a line of credit with your bank can help to
cover times when cash is short and you need to cover inventory
purchases, meet payroll during the slow season or cover
unexpected expenses.
Using credit cards to finance your business is expensive
but can be an effective bridge over cash troubles.
Barter.
The ancient practice of bartering -- trading for goods & services
-- works well today. Whether you join a formal business
trade network such as ITEX or trade informally with your
business partners, bartering can help you obtain needed
goods and services for your business without cash.
Buy 'Used' or Lease.
Shopping for second-hand office equipment, store fixtures,
computers and copiers can save you big dollars. Leasing
equipment can also reduce your cash requirements up front.
In conclusion, spend cautiously. Get paid promptly.
Expand only when revenue projections are solid.
Here's a vivid example of how quickly cash can disappear
and leave you in a crunch: imagine yourself in a small
car (revenue) being tailgated by a big truck (expenses).
If revenue slows even a little, expenses (which are much
harder to slow) overtake revenue, and it's a cash crunch.
Take steps to improve your cash flow before you need to;
it will smooth the growth of your business.
Jean D. Sifleet
Attorney & CPA
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