Cash strapped businesses can’t grow
I’ve got a big cash crunch coming up. We have a big contract and they’re not making payments. We have expenses that just won’t go away. New work is coming in that needs to be worked on. Our bank account is getting low; our credit lines are tapped out. It’s a good business overall, just right now things are really tight, we’re cash strapped. How do we get through this period?
Thoughts of the day: Get a handle on what it really costs to operate. Make cuts to get the bottom line positive. Make a plan to pay down the credit line and build up cash. Going forward, protect the company’s cash reserves for times like these.
It’s time to be honest; there are probably several contributing factors for lack of cash – not just because someone decided not to pay you on time.
A healthy business has 6 months of overhead in cash reserves on hand. Seems like a lot of money, until you need it and don’t have it. We recommend that you keep the money in the business, but if you keep it at home, make sure it’s only used for the business.
As the business grew, the credit line might not have been big enough to handle a growing list of accounts receivable. A credit line should be in place to cover the company’s needs for outstanding accounts receivable. Compare the amount in a/r at 30, 60 and 90 days to the amount of invoices/month. Graph out all 4 to see the trends.
Have contracts in place with clients to help buffer and protect the company.
Contracts with clients should contain penalty terms for payments that go more than 30 days past due. Beware of big, juicy contracts that require you to carry the a/r for 60 or 90 days. Beef up your sales efforts to get more clients that will do business on 30-day terms. Requiring payment on presentation of invoice or via credit card at time of service is best.
Are you spending too much? Create a budget for spending based on realistic revenue goals.
There might be overspending going on. Check how much money is left over at the end of the month. Lack of a clear picture of all of the company’s expenses can cause real problems. Depending on the P&L to tell you what’s going on with expenses is a mistake. In addition to expenses on the P&L, you have to factor in the principal payments on any loans. Someone needs to figure out a schedule of income based on a realistic, not optimistic, estimate of time to collect invoices from various clients.
If you think you’re spending too much, check if it’s because of expenses related to delivering new work (cost of goods sold), which is OK. Find out if overspending is coming from overhead. Carrying too much in overhead expenses can be a real killer in any business. Be ruthless. Make cuts. Get spending in line so you can make a profit every month.
Work backwards, how much gross profit do you need to cover overhead and balance sheet items?
Figure out how much revenue less cost of goods sold, otherwise known as gross profit, you need to pay for overhead, principal payments on loans, taxes, distributions to shareholders and to put money in the bank. There’s a lot of demands on profits and most business owners don’t have a good handle on how much profit they need each month. Once you know how much profit, build a plan to grow sales to match the income needed.
Bad things happen, especially when you’re least prepared to handle it.
Be prepared by always having enough cash on hand to get out of trouble, and then some. Bad things can unexpectedly come at any business. Don’t make the mistake of thinking that it will always be smooth sailing, that somehow your business is special. Make sure your company is prepared to successfully handle whatever life throws its way.