You don’t need me to tell you that if a business runs out of cash, it is out of business. Understanding the cash flow of your business is paramount to its success — old news right? However, this is where many small businesses begin to fail. If your cash flow is dwindling, you can’t stick your head in the sand. You have to react, and react, quickly. Here are four things you can do right away that may alleviate the problem.
1. Renegotiate terms
Debt can suck more than its fair share of cash from your business. Review your business debts with a critical eye. Are the monthly payments too high to manage? Reach out to your creditors. Explain what problems the debt structure is creating for your business.
Are the interest rates you negotiated in the past, equitable today? Offer alternative payment plans by way of a refinance. Your creditors understand that cash flow is the life’s blood of any business and chances are very good that they will listen carefully to a fact-based argument to lower payments and/or rates.
2. Review obligations
Any review should include other recurring and non-recurring obligations, from staffing requirements to what you pay for paper clips. You aren’t the first entrepreneur or startup to overestimate the potential of your enterprise and spend what you think you will earn instead of what you actually earn.
While optimism regarding a business’ prospects is a generally healthy attitude, over-optimism can result in extravagant spending, or committing to contractual obligations that genuinely exceed the needs of your business. This is not the time to lease a BMW as your company car or indulge clients with three martini lunches. Look at everything! If it isn’t necessary, lose it!
3. Grow your customer base.
I understand that this seems like a no-brainer, but it is very easy to become complacent when things are going well. If you are guilty of this, you need to get to work. Have you lost any customers? If so, you need to find out why and fix it.
Take a good look at your product or service offerings. Are they still relevant in today’s market? Has your business introduced anything innovative to attract additional customers? Use existing clients to leverage these new products or services. At the same time, you need to make a critical examination of your marketing strategies. Are they stale? Non-existent? Poorly targeted? Do you see evidence of seasonal trends? Consider all these factors and any others relevant to your business. Maybe you can smooth out the seasonal dips by offering a discount during slack times.
4. Check receivables and inventory
Are you and your staff on top your accounts receivable. If your business is having a rough patch, maybe your customers are feeling the pinch too! It is always a difficult balancing act to pressure customers for payment. No one wants to lose a customer, but if you don’t take a reasonable and firm stand, you won’t be there to offer them a product or service. Isn’t that bad for both you and your customer? If you are in a particular sensitive situation, due to the nature of your business or you haven’t the personality to take a convincing hard-line on past due receivables, or you just need the cash immediately, you might consider factoring.
By engaging the expertise of a factoring firm, you put the collection of these receivables in the hands of a third party. In exchange, you get your money up front. There’s a great little online tool which can provide some concrete numbers for your business. You don’t have to contact them. The tool is simple, free and available online. If you like what you see, then you can take it to the next level.
If you are selling widgets, how many do you have in inventory and how much is storing them costing your business? Surplus inventories can be a drain on your business. If you are “overstocked” remember the old adage, “Your first loss is your best loss.” If you can’t grow your customer base rapidly enough to shrink inventory levels, bite the proverbial bullet and discount the inventory to get cashing the door and inventory off the books.
I hope these tips will motivate you to take positive and immediate action to reverse any negative cash flow trend in your business. If you are doing well, great! However, keep these tips in mind in the day-to-day conduct of your business. Cash flow problems happen to the best of us.
Andrew Cravenho is the CEO of CBAC LLC and Factor Auction. As a serial entrepreneur, Andrew focuses on helping both small and medium sized businesses take control of their cash flow. Prior to CBAC, Andrew founded an annuity financing company relieving tort victims of financial hardship.