What To Do In A Cash Flow Crunch
 By Jackson W. Feldman

Cash is king. If you don’t believe it, run out of cash and see what happens.

Cash flow problems are a principle cause of small-business failures. Even successful businesses can be done in by congestion in the cash-flow stream.

We won’t belabor how to avoid cash flow problems with such activities as regular billing cycles and persistence in collecting what’s due in a timely manner.

But once a cash crunch arrives, it will be obvious. Here’s how to recognize that cash flow is becoming a problem and some ideas for action if cash flow slows to a drip.

Recognizing A Cash Flow Problem
Various financial ratios are helpful to gauge business liquidity and cash flow.

One is the current ratio, which equals current assets divided by current liabilities. It shows whether you can meet obligations. It’s good to have $2 in current assets for every $1 in current liabilities.

Another standard is the quick ratio, the relationship of cash plus marketable securities (such as certificates of deposit) plus accounts receivable divided by current liabilities. This more stringent standard should be at least one-to-one.

Reviewing these ratios at least once a month can alert you to evolving cash flow problems, which are more easily dealt with as they develop than after they arrive.

You also should consider the economy.

Uncertain times require greater cash on hand. Invest some cash in marketable securities to earn a higher rate of return than in a checking account. For instance, a money market account keeps cash liquid, but usually pays at least a little interest. This otherwise idle cash can add to your income, supplementing cash flow.

If business ebbs and flows by season, adjust your minimal cash-on-hand accordingly.

Solving A Cash Flow Problem
Once the cash flow weakens from a trickle to a mere drip, here are some practical approaches to take before the stream runs completely dry.

• Factoring is common among fast-growing businesses. A factor is an entity that buys your accounts receivable for less than its full value, accelerating your cash on hand. You get the money sooner, but less of it. The factor entity then collects the accounts due, which brings up another downside: The factors’ collection services might be more aggressive than your creditors appreciate.

• If you’ve taken on ancillary products or services, consider licensing their operation to others. Royalties and upfront fees you receive pump up cash flow, which continues from those sources as your licensees take over the cost of sales.

• Immediately take steps to consolidate or reduce monthly expenditures. Look for vendors willing to discount goods or services in order to get your business. Telephone companies, for example, increasingly are moving into Internet access and even cable television. By combining what three vendors once sold you individually, you may be able to cut your overall costs and monthly outgo.

• Utilities too can be a source for reducing bills that spike during particular seasons. Some electrical utilities offer year-round, flat-rate plans to average your annual expense. A great time to switch is just before you usually experience a spike in usage and in your monthly bill.

• Reevaluate long-term advertising contracts. Must you pay to advertise during months when business typically lulls? Be careful here. As with all marketing, you don’t want to fall into the trap of promoting your business only in good times – or only in bad times. Nevertheless, there may be times in which your ad dollar isn’t returning enough to warrant its cost.

• If cash flow reaches the crisis point, be willing to make tough decisions. Laying off employees is unpleasant. But when you can’t pay them, it’s unavoidable. If you can fix the cash flow crisis in time, you may be able to work out agreements with employees to take reduced pay for reduced work, scaling back rather than grinding to a halt. It’s in your interest and theirs to keep the ship afloat until cash flow is restored to healthy levels.

(Posted October 2007)

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