Brooke Lively, a member of the Entrepreneurs’ Organization (EO) of Fort Worth, is the founder and president of Cathedral Capital, which provides strategic financial advice to drive profit by building custom teams of finance professionals to analyze data trends and guide entrepreneurs through their numbers so they can scale and grow their businesses in predictable ways. We asked Brooke what options entrepreneurs have when faced with a cash crunch. Here’s what she shared.
Over the years, helping businesses pivot to profitability, we’ve helped solve hundreds of cash flow issues across various industries. I learned that the biggest determinant of success was the time we have until the cash flow crisis hits. The more time we had to resolve the issue, the better able we were to avoid a future situation.
While there are three main levers you can use to affect cash flow, the most essential element to implement is a forward-looking cash flow forecast that functions as an early warning system.
We recommend clients look ahead six to eight weeks into the future on a week-by-week basis. Why weekly? As every business owner knows, not all weeks are created equal. The first and third weeks of the month are the most expensive as most businesses pay rent the first week and the payroll often falls in the first and third weeks.
And if uneven outflows weren’t enough, incomes never seems to match. Customers rarely care about the due date of an invoice. Even if your policy is net 10 or net 15, they seem to think they have until the end of the month to pay. And as the end of the month approaches, customers start playing this game of “which bills really need to be paid?”
For business owners, it all comes down to three fundamental factors:
- Expenses are predictable.
- Revenues are estimable.
- Mismatch is inevitable.
Because of these three factors, it’s crucial to create a cash flow forecast that will tell you – as far in advance as possible – when you might face a cash flow crisis.
Once you identify an upcoming cash crisis, you have options to deal with the impending problem. Here are the top three levers you can pull, along with a checklist to help you troubleshoot to find the right solution for your business.
Lever 1: Credit
Credit card. Although credit cards are one of the most expensive options for financing a cash crisis, most people have them or find them relatively easy to obtain. If you have credit available, transfer the expenses to the card to avoid your crisis.
- Make a lower payment on your credit card if you have room after ensuring that the necessary charges will not be declined.
- Request that your credit limit be increased.
- Get new credit. It’s not as easy as it used to be, but it’s fast. When you ask for most cards, you get an immediate response. Many companies will even give you a temporary number so you can make charges until your permanent card arrives within a week.
Line of credit (LOC). Every business should have a line of credit, whether you think you need one or not. Think of it as free insurance. If you have an established relationship with your bank, you can usually get one in about a week. If you need to shop around for a new bank, it may take a little longer. Two things to note:
- If your business is small, you will probably need to put a personal guarantee on the LOC, which means they will ask you for all of your personal financial information.
- Ironically, banks prefer to lend money to people who don’t need it. So it’s a good idea to get a letter of credit as soon as possible, use it to keep it current, and as your business grows, don’t be afraid to ask the bank to increase it.
Lever 2: Expenses
Reduce expenses. Ask yourself what isn’t necessary to keep your business running.
Moving expenses. You can usually transfer most bills and expenses. But never touch the pay!
Change your salary, draw or distributions. Ask yourself if you need all the money you planned to take home. Sometimes it is better to leave money in the business, but only if it does not cause significant difficulties at home.
Lever 3: Revenue
What can you sell to solve the lack of cash problem? We have found that in most cases there is an additional product or service that you can sell to your customers that will make a big difference in the bottom line of your business. Think about how fast food places always ask, “Do you want fries with that?” It works for them – and it can work for you too.
As you can see, there are several levers you can pull to help counteract a cash shortage. The solution is usually a mixture of all three; there is usually no one silver bullet.