4 Rules to Cure a Cash Flow Crisis

David Worrell
Tue, 01 Jan 2013 00:00:00 +0000

What would you do if your company ran out of cash?

I'm not talking profits. You can be profitable on paper and still have nothing in the bank to pay bills. The recession once made this sad fact painfully obvious for a lot of companies.

For my company, the recent recession was a cash flow crisis in slow motion. There were some canceled sales, to be sure. But the real pain came when customers slowed down their payments.

And that kind of situation can kill even a profitable company.

The key to surviving is fast action. Here are steps that any entrepreneur should consider when conditions change and cash slows down:

1. Know the numbers. In good times and bad, keep an eye on key cash flow numbers. I'm not talking just about a cash flow statement each month, but also about key ratios or metrics in your business. Learn the "Current Ratio" and "Days Receivables Outstanding" for your business and monitor these numbers like a hawk. If you start this habit in good times, you'll have forewarning when cash turns against you.

2. Cut your own pay...now! Besides taking pressure off of cash, this will motivate you to fix the problem. If you hide behind a salary -- and keep building debt, or laying off staff to pay yourself -- the problem will grow worse until it is out of control. Cutting your own pay also demonstrates leadership to your team.

3. Meet with your banker. If you are using loans -- like I do -- to smooth out cash flow, it's time to let the banker know what's going on. The closer you work with your bank, the more it can help you. Lay out the issues clearly, and be ready with a reasonable plan to improve the situation. Show where you are at and how you will pay back the debt. Your bank will appreciate the communication and reward you with patience when you need it the most. Whatever you do, don't miss a payment and do keep an eye on any loan covenants.

4. Finally, know when to say when. No matter how savvy the owner, some businesses will simply fail. I watched a friend's machine tool business go from $3 million in sales to $300,000 overnight when the auto industry was in trouble. Nobody can survive that. He was smart enough, however, to look into the future and pull the plug before the situation moved from bad to worse. Again, a grasp of the above ratios is a good first step.

Nobody can control all the factors that impact cash, but you can measure and monitor most of them. You can react quickly. You can be decisive and focused.

There is no single problem quite like a lack of cash in a small business. It deserves your full attention. And ignoring it will not make the problem go away. But with careful monitoring and ample action, most cash flow problems can be cured.

Dedicated to your positive cash flow!

David

P.S. I am a business owner just like you. I'm also a finance geek. I live and die by the numbers. If you're looking for clarity and direction in your business, readers of AllBusiness.com have a special page on my website with exclusive access to free business finance resources.