Man oh Man, Don’t Run Out of Cash

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    One of the main reasons companies go out of business is for lack of cash. These companies may even be growing, successful in the market — but they run out of cash.

    Don’t let this happen to you.

    Make sure you prepare cash flow projections on a regular basis. One time of great risk is expansion. There will be investment in buildings, equipment and/or inventory. It is critical to be sure the business has the cash to finance this.

    Think about the cash-to-cash gap. That is the gap between spending money on raw materials and then getting cash from the customer. Just think, you will need to make the product from the raw materials, ship it to the customer, and then be paid before the company gets that cash. Without a projection of cash flow, you won’t know if there is going to be trouble.

    If you realise that the 30 days it takes to make the product and the 45 days it takes customers to pay will strap the company for cash, it can be possible to set up different payment terms. Perhaps a prepay will be needed, and will be acceptable to the customer. Or perhaps on the basis of the cash flow projections, the bank will loan you extra until the cash flow gets healthier.

    It’s really important to look at the best case, worst case and most likely case for these cah flow projections – and don’t forget to include ALL the expenses. This is always a good reason for an accountant to prepare these projections – they generally think of all the expenses. Check it over to be sure.

    So expansion can be an exciting and risky time for the business. Keeping track of the cash flow will assist in the preparation for and during the expansion.

    Monitor the accounts payables and the accounts receivables. The sooner receivables are collected, the shorter is the cash-to-cash gap. It can help to provide a discount to customers to pay sooner, especially if the business is or is expected to be in a cash crunch.

    While cash is a problem, a cheap source of financing is ‘stretching’ the accounts payables, that is, paying them later. However, if you can see there will be problems with paying particularly key suppliers, then it is a very good idea to take your courage in hand and call them to set up a payment plan. It will be key to make payments on time, according to the plan, in order to retain credibility with your suppliers. If this occurs, they will look favorably on your phone call. Otherwise, the supplier sees the later and later payments and has no idea what is going on. Not the way to build a partnership.

    So, congratulations on your business success, and ability to expand. Just be careful the business has enough cash during this time.

    Photo credit: Blatant News

    For more resources, see the Library topic Business Development.