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Strategies to Help Small Business Cashflow During a Cashflow Crunch

Guest post by: Matt Winter

Article Overview: When economic times are tough, you need unique strategies to maximize your cashflow and squeeze the most out of every single dollar. Following these tips can help you prioritize your small business to-do list and keep you afloat during rough financial seas.

Strategies to Help Small Business Cashflow During a Cashflow Crunch

When times are tough and you've got a business to run, what do you do when the cash flow is shrinking and the bills are still coming? It's a scenario that an overwhelming percentage of businesses face at one time or another.

Does this sound somewhat familiar: you’ve got $3200 in cash (great!)... but you’ve got way more than that in expenses for this month (not so great). You’ve got the employees to pay, you’ve got the suppliers to pay, then there’s the taxes, your bank note and other related business expenses - including your utilities - to pay. Ouch!

It certainly sounds like a bleak picture, but we’ve all heard it before and most businesses have experienced a month or two like this themselves. In fact, it seems like we hear about this type of financial crunch all to often these days.

But just because your cash flow is down to a trickle instead of a steady flow, it doesn’t mean that you should throw in the towel. Small business owners are a tough bunch. You have to be to endure all of the ups and downs that go along with business ownership. If anyone can weather a cash flow crunch and come out the other side, it's YOU!

So, let’s focus on some ways to relieve your stress and get back to business.

First of all, take a breath and then take heart... the fact that you are still opening your doors every day is proof that you can push through this financial challenge. Now, let’s take a look at the big picture and evaluate those priorities.

Priorities, Priorities, Priorities

First, you wouldn’t be able to operate that business without your worker bees, so payroll is an absolute must. Of course, there’s also the fact that the IRS does some serious frowning on late payroll deposits and you will absolutely be penalized for not following their rules. There are also some states that penalize you for being late with that payroll. In short, DON’T MISS PAYROLL!

Now, if you have an employee retirement program DON’T EVEN THINK about using those funds to cover your current expenses. That is a violation of federal law and you do not want to face the penalties there. The same holds true for your quarterly tax payments. Again, you’ll face some stiff penalties if you miss them and you’ll also have a tough time catching up on the payments.

Do your best to keep your credit history in good shape. This has become a huge challenge for both businesses and consumers with the economy, but do what you can. Try to pay at least the minimum on any credit cards, equipment leases, insurance premiums, etc. Normally, these guys will hit you hard and fast if you are late or delinquent with your payments. Some have become a little more lenient because so many businesses are facing tough times, but don’t push it. Try your best to stay current and be quick to call them if you are having problems.

A good strategy for keeping those priorities in line: 1. payroll 2. taxes 3. bank 4. leases 5. credit cards.

Lay Out a Schedule for Your Vendor Payments

But what about those vendors? They all have guidelines for payment and those guidelines generally range from 30-60 days. Some have gotten a bit stricter over the past several months though, cutting that payment time to 20 days. Being delinquent doesn’t necessarily mean that your account is going straight to collection after one missed payment; most wait for 60-90 days before handing your account to collections. But you need to know what each vendor considers acceptable and what their level of tolerance may be.

Don’t be afraid to call and ask for each vendors’ current payment terms and collection policies. If you don’t want to call (and some businesses don’t because they feel it draws attention to their account) you need to play close attention to each vendor’s reaction to your late payments.

Does vendor A give you a call after 30 days or send a inquiry letter after 45 days? Pay attention - it’s important to know this information for each and every vendor. Once you see those follow-up patterns, make a record of them. This information can come in very handy if you need to get creative with the timing of your vendor payments. You’ll know what kind of time cushion you have for sending in that payment without facing too many undue penalties.

Since you don’t want to incur those late payment penalties, you need to determine which vendor(s) cost you the most each month. This means that you need to include the cost of those late fees and interest into the monthly amount due to really see which vendor costs you more. You may be surprised. Whichever vendor(s) these turn out to be, they will be the ones that you want to pay first.

Become a Master Negotiator

We’ve looked at some ways to get creative with your invoice payments, but sometimes that’s not enough. You may be in a position where you still can’t quite keep those payments up to date. Now what?

Now is the time to really roll up those sleeves and start picking up that phone. You need to call those suppliers and start negotiating. And actually, your courage is more likely to pay off now than ever before!

Because so many businesses have been facing financial challenges over the past several months, vendors and suppliers are far more open to working with those businesses that have the guts to call them and say that they are having problems. Be up front and tell them what would be beneficial to you. You may be surprised at how willing they will be to work with you and come up with some type of arrangement that will ease your burden.

Don’t Call Unless You Really Need To Call

While you should be open to calling those suppliers and flexing those negotiating skills, you don’t need to be too hasty when grabbing for that phone. You may be tempted to call a vendor or supplier at the first sign of payment trouble. Don’t!

By being overanxious in calling a vendor or supplier, you may make them nervous. Now, instead of that phone call working for you it’s working against you. As I’ve said before, almost every business has faced, or will face, a financial hurdle at some point. What’s important now is to know whether this is going to be a short-term hiccup or a long-term issue.

If you are looking at short-term challenges, don’t start calling everyone. This is when you need to develop a creative payment plan based on those cost priorities that we discussed earlier. Hold those phone calls unless/until you are facing those long-term problems, i.e. your payment is going to be delayed two months or more.

Get a Step Ahead By Showing That You Are Trustworthy

Now that we’ve covered the bases on how and when to start making those negotiation phone calls, let’s talk about some things to do to help those calls go better.

One thing that will help you out tremendously - should you ever need to start calling your suppliers - is to have a reputation as a trustworthy business person. You want such a reputation anyway, but it will serve you extremely well in this type of situation.

Do people consider you trustworthy? Whether your answer is ‘yes’ or ‘no’, or even ‘I don’t know’, let’s make sure that you start building up that credibility from this point forward.

The absolute best way to build your credibility is to do more when you are having good months. This means that in better months you might consider paying early or even paying a little extra toward your future balances. Also, if someone calls about an overdue payment, set a date to pay that balance and stick to it! This shows that you are as good as your word and that is a monumental thing is today’s world of business.

You might think that these actions will have little impact, but that is far from the case. Doing little things like this will build a good relationship and a lot of goodwill with your vendors and that, my friends, can go a long, long way during tough times.

Know Your Safety Nets and Be Proactive

What we’ve gone over so far are steps that will buy you time and help you get creative with your payments when you are experiencing slower cash flow. Unfortunately, that might not always be enough to keep things moving forward.

If you are really experiencing a serious cash crunch, there are ways to get some extra cash. You can get a working capital loan or an equity line of credit. There are also the old standards: garage sale, extra job(s), or the often overlooked loan from family/friends. You might even take a look at trying to obtain venture capital.

That’s a quick look at some of the financing options. But collecting the money that you are owed can be a HUGE boost to that cash flow.

Don't Forget to Collect Your Accounts Receivable

What is your current rate of collection on your accounts receivable? If it’s less than 90%, you need to gather your courage and really put some effort toward improving your own account collections.

So many of our clients have a less than optimum grasp on their accounts receivable. In most instances, they are either big-hearted and want to give their customers the benefit of the doubt OR they are afraid of a confrontation over collecting on that account which could lead to a loss of that customer all together. But you can have the best of both worlds - collect your money while building good customer PR - and still get your A/R collections to around 95%+. How would that impact your cash flow?!

There are several ways that you can improve your accounts receivable. First, don’t invoice if you can avoid it. If you handle projects you can accept partial payment up front with the remainder due upon project completion. When invoicing, make sure to submit the invoice to the right person and ALWAYS have a duplicate for your records. Make sure that customers and clients understand your payment terms. Follow up with late payers on the first day after payment is due.

If your business handles higher-dollar accounts, consider a payment plan or in-house financing option. These two services allow you to retain control over your A/R while being considerate of your customers’ ability to pay you. There is also the added benefit that these services give your business an extra edge over the competition because you can offer more options to customers and those customers will greatly appreciate you for that.

By getting creative with your payments to vendors and suppliers as well as getting a better grip on your own accounts receivable collections, you can go a long way to easing the stress of slow cash flow. Financial hiccups are a fact of the business world. Learning some strategies to overcome those hiccups can help you weather the storm and be stronger in the long run. Stay focused and you’ll be the one standing when the competition has folded up their tent and gone home!

Copyright © 2010 Matt Winter

All Rights Reserved

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Article Tags: accounts receivable cash, business cashflow, small business



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