Managing Cash Flow

Q. I own a small business and things have been pretty tight recently. While I am making payroll and paying the bills, I haven’t been able to pay myself for the last few months. Do you have any ideas regarding how I can increase the cash flow of my business?

A. Many small-business owners are struggling with cash flow issues. For the first time in years, they are putting money into their business to cover monthly expenses. Given the economy, this isn’t surprising. Fortunately, small-business owners do have options to improve cash flow.

1. Get control of the checkbook and the inventory – Verify that every nickel that leaves your business is going to a legitimate creditor. A surprising number of small businesses fall victim to fraud. Similarly, make sure that your inventory is going to paying customers and not home with your employees. The Small Business Administration estimates 30 percent of small-business failures are the result of employee theft. Don’t think that your business is exempt. As Ronald Reagan said, “Trust, but verify.”

2. Make prudent reductions in operating expenses – Unless you have no choice, don’t slash and burn, making cuts that will cripple your business in the long term. However, in difficult times, it makes sense to reduce operating expenses. One example of a place to look is overtime pay. If sales are below budget, you shouldn’t be paying overtime to production and warehouse workers.

3. Delay capital spending – Unless the payback is very short (e.g., a couple of months at most) delay capital spending when the business is in a cash crunch. In the long run, you have to invest in your businesses or see it die a slow and painful death. However, there are right times to invest. When a business is struggling to make payroll, it is not the right time.

4. Reduce working capital – Accounts receivable and inventory suck up cash. When things are tight, collect what is owed your business as quickly as possible. However, be cautious about factoring your receivables. When annualized, the interest rates are often usury. Selling excess inventory, even at fire sale prices, will generate cash. Reducing inventory without hurting customer service will put cash in your pocket. Similarly, stretching your payables without damaging supplier relationships can be helpful.

5. Consider refinancing – Restructuring debt can lower monthly payments. All else equal, if the term of a loan can be increased or the interest rate reduced, monthly payments will drop. Refinancing assets can put cash in your pocket.

6. Grow sales, MAYBE – One of the most common reactions to a cash flow squeeze is to grow sales. This makes sense. All else equal, sales growth will generate increased profit. But, as a savvy finance expert drilled into our heads, “You can’t buy beer with profit, you can only buy beer with cash.” If growing sales means increasing accounts receivable and inventory, it can actually result in a short-term reduction in cash flow. Companies can literally grow themselves into bankruptcy, and do all too often. Before attempting to grow sales to relieve cash flow pressure, make sure that this will make things better not worse. Businesses can survive a cash flow crunch. But, the wrong move can be fatal. What’s needed is a well-crafted plan of action that will inevitably include some or all of the items above.

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