You spent a lot of time and energy planning and organising, but you forgot to make a plan for one thing. What happens if things go wrong? How can a profitable business run out of cash?
What can you do when you only have some days to pay your suppliers and your bank and have no cash?
That’s a challenging scenario. It might make you feel better to read that a lot of companies go through that. The good news is that there are a lot of things you can do about it!
Unnecessary Expenses
The first thing to do is to cut any unnecessary expenses. For example, you shouldn’t be paying any bonus until you get back on your feet. In addition, you should consider cutting down your discretionary expenses (things like stationery expenses, advertising expenses, entertainments costs etc.)
Unused Overdraft
You might have an unused overdraft, or you may be able to arrange for an overdraft facility.
Payment Rescheduling
In addition, you should try to postpone any payment you can. For example, you can start by contacting your suppliers (from the ones you have the best relationship with) and asking them to re-negotiate the credit terms or extend the payment period. This is a tricky one, and most suppliers will not be happy to hear that.
Leases
You also have the option to sell part of your equipment and lease it back using a capital lease. Capital leases are standard for big companies since they can minimise capital expenditure but still “buy” the machinery they need. You can either dispose of your assets and lease brand new equipment or find a company willing to help you with a leaseback.
Factoring
Another option is to sell your accounts receivable to a factor. Accounts receivable factoring is a contract where you sell your accounts receivable to a specialised company. You get some cash now for invoices that otherwise payment would made in the future. There is, of course, a fee that you will need to pay. The fee depends on the creditworthiness of your customers.
Debtor Management
Apart from controlling your cash outflows, it would help if you tried to increase your cash inflows. Do you have any invoices that you should have money for already, but your customers “forgot” to pay them? It’s probably a good time to contact them! In addition, try to collect any bad debt you have. There are bad debt collection agencies that you can use for that!
Discounts
Try to incentivise your customers to pay on or in time. You can create prompt payment discounts and motivate your customers to use them.
Sales and Promotions
As part of your marketing strategy, you should have created a list of your customers. You can try to make a promotional offer for a limited time and contact them. Just bear in mind that you might not increase your sales but discount future sales by doing that.
These are, of course, some of the options that you have and remember that your company is not the first company that goes through such difficulties. You are not the first to wonder how can a profitable business run out of cash. Try to analyse what your options are, make a plan and take action. The most important thing to do is to understand what are the reasons that brought your company here.
Final Thoughts
In our small accounting practice we have seen this time and again. A small profitable business owner comes to us wondering how in the world they are about to run out of cash. Sometimes we can help them get back on their feet, sometimes we can’t. And this depends on two things. First, how far are they down the line of running out of cash. Or in otherwords, how close are they to that cliff. Second, are they willing to take advice and do the things necessary to turn it around. Yes, sometimes they are not willing to take these steps. Or listen to the advice.
But don’t underestimate how important cash flow management is. Remember, you can keep an unprofitable business going if it has the money to do so. But you can’t keep a profitable business running if it has no money left. And for those operating as companies, the directors aren’t even alllowed to do the latter. Perhaps another article one day on directors’ duties.