How to Ease Your Business' Cash Flow Crunch
Many businesses are short on cash right now. Whatever the reason for your short-term crisis, you need to begin to view your existing cash reserves strategically, and use creative budgeting solutions to position your company as a great customer, vendor, and industry leader. Here is a brief list of ideas to help you start planning your own creative solutions.
1) Conserve existing cash. There are two main flows, out and in. You should put a hold on any unnecessary purchases immediately. For the most part, you should not approve any new expenditure unless you have an emergency, the expenditure directly provides value to your customers, or it will immediately generate revenue. It is not personal; it is just the new company policy. To improve the inflow of money, communicate with those who owe you and develop a partnership as you work together. Mark expected receipts on your calendar and follow up if commitments are not kept.
2) Ask employees for cost-saving suggestions. At my mom's retirement community, the managers asked residents for suggestions on ways to save money on energy. For instance, a resident suggested that the community should light only half of the ceiling lights in the many lengthy hallways; they'll be saving half of the cost of lighting in those areas by using every other light. There were several other great ideas. Ask people to think about ways to save money or be more efficient. What could you live without? Tell the team that you expect each of them to call you (or their team leader) within a week with their suggestions.
3) Barter. Whether you owe someone or they owe you, bartering may be beneficial when cash is extremely tight. The best time to barter is before you owe someone, because you should always try to live up to the agreement you have made. However, when there is no cash and you owe vendor money, you can offer goods or services to settle a debt. If your customer owes your company money, approach the business owner and request goods or services to settle the debt. Try to gain goods and services that directly or indirectly create cash flow or that reduce your expenditures for essential customer-facing services. If your customer owes you and you owe another company, the deal maker in your company may even be able to negotiate a deal so that a company that owes you actually provides the goods or services to the company that you owe. Depending upon your business relationships, bartering can be lucrative and good for business. (It is always a good idea to have a lawyer draw up the contract. Also, you'll need to let your accountant know about any bartering transactions.)
4) Negotiate payment terms. If bartering didn't work and you still can't pay as agreed, you'll need to renegotiate payment terms. Call the accounts receivable manager at the vendor and ask for flexibility while you work to solve a short-term cash crisis. If you have facts and figures, make sure to throw them in. For example, you could say, "Hi! This is Tracy, the accounts payable manager from XYZ Company. I'm calling you as one of our most valued vendors to ask you for some flexibility in payment terms while we work out a short-term cash flow issue. Fortunately, our sales are still fairly strong given the economy, and our accounts receivable manager is working with our debtors so that we can better predict the timing of our receipts. We've taken measures to reduce expenses by $50,000 per month and have plans for further expense reductions based on employee input. To preserve our profitable
relationship for the brighter days ahead, I would like to propose that we pay you 40% of what we owe now, and then 15% of that original amount for each of the next four months, and if we can pay you sooner, that's what we'll do. I see here your terms are net 15 and then you charge 2% interest for each month after that. Who would I speak with to see if we can get the interest to be lowered to 1%?" Convince the vendor that you are able to honor the new agreement. You can use a similar tactic to get people to pay you. Show concern for the other business, put a positive spin on your offer, and be a strong advocate for your company.
5) Take it back. If you think that you can resell the merchandise, you can offer to reduce the debt by accepting a product return minus a 10% restocking fee and transportation costs.
6) If your client is repaying you on a schedule, sell additional product to that client on a cash-only (plus a small portion of the balance) basis. Be practical but positive when you proactively communicate your desire to continue doing business. It would be silly to extend more debt to a floundering company, but selling on a cash-only basis will create cash flow for you and may help them to stay in business so that they can pay their debts in the future. Alternatively, if you need to buy some things on a cash basis, pitch the idea to your supplier. Most companies today would be happy to get some cash.
7) Preserve your relationship with other businesses that are in a cash crisis. It is in your best interest to preserve existing relationships and make them work now and for your mutual long-term benefit. If you contribute to another company's cash problems, you may miss that relationship when the economy starts improving again. 8) Make sure that the organization is lean and strategically organized. Look at every position within your organization with an eye on identifying those positions and tasks that are not providing value to your bottom line. With team input, set reasonable goals for productivity and communicate the goals both formally and informally. Treat this situation as the emergency it is, and strategically downsize positions that are not critical to your mission. Alternatively, if you find highly-paid employees spending a lot of time on administrative tasks, you may want to hire a temporary administrative assistant to take care of the nuts and bolts so that you can establish higher standards for professionalism and set higher goals. It makes sense to assign work to the least expensive resource. When downsizing it's important to look at what the company will need in the long run. Some companies have the habit of eliminating jobs and then adding those positions back a short while later. While that may give a temporary lift to the balance sheet, the cost of rehiring and then retraining for those positions far exceeds the amount that was saved. Keep morale and productivity high by being logical and calm in your human resource decisions.
9) Continue to be passionate about your product and the benefits it provides. Get excited over every improvement or deal you make and every dollar that's in your bank account. After all, the plans you're laying now are the foundation for your successful future.
10) For your strategic plans, focus on your core business. Many companies want to run for greener pastures when the economy is struggling, but I recently read a Harvard Review article that explained why diversifying too much is a bad idea. If your company is in trouble, you will probably not have the resources to create new
distribution channels and fight your way into a new (and possibly shrinking) market segment against entrenched competition. It's like trying to build a house on a foundation of sand. In many instances, the best idea in tough times is to focus on the core business, invest in quality and customer satisfaction as best you can, and hold the long-term course that the company has set. Very few desperate people make logical decisions. You don't want to pursue new business at the expense of existing business, and that is often what happens. By all means, build on your existing customer base and strengthen your core business offerings. Realize though, that many successful businesses actually sell their diversified holdings in tough times so that they can focus like a laser beam on the most important core business processes. Diversifying makes sense for personal investments, but in business your strengths will carry the day.