Cash flow issues can be very challenging to manage. They can show up unexpectedly. They can come on very quickly. They can distract the business owner from the important work he or she should be doing.
They can disrupt the ability of the company to get a project done. And in their most severe form, they can cause a business to fail.
A cash flow issue is always a symptom of a bigger underlying problem. Often times, business owners will ignore the early indications of a cash flow issue. They might choose to ride it out the best they can. Or, they might borrow money to keep the business flowing.
They will likely reduce or eliminate their own compensation. They will deal with the symptoms of not having enough cash without actually figuring what is causing the issue.
There is another way, a better way. First, as soon as you start having cash flow concerns, you need to act, quickly and deliberately. If you find yourself in that situation, you should…
- Quickly assess the reality by capturing all expected cash deposits and all demands on cash for the next 90 days.
- Organize expected cash receipts and all projected cash expenditures into a cash flow worksheet that monitors weekly demand and ends on the day of the week that payroll must be covered.
- Develop a strategy to immediately lessen cash flow burdens and buy some time with short-term measures – ask what can you cut without impacting customer service?
- Dig in to find the root causes of the problem, why is cash flow tight.
- Slow paying clients or poorly structured draw schedules.
- Low profit margins.
- Job delays in design, production or completion.
- Unexpected overhead costs.
- Any number of other potential causes.
- Develop appropriate countermeasures (strategies for attacking the root cause).
- Determine how much will be take in short term funding to weather the cash flow situation while you are fixing the core problem.
- Make arrangement for short-term cash “bridge” to keep things flowing during this critical time.
- Respond immediately to any delay of payments or differences in projected amounts that will adversely impact the cash flow situation.
- Continue to monitor cash flow 90-days out until you know the issue has been resolved
Moral of the story
Cash Flow Issues do not get better with age. The sooner you can identify the problem, identify countermeasures and take corrective action, the better chance you have to get cash flow restored and the business back on track.
Note: This is Part 2 of a 3 Part Series on Cash Flow, presented by our Director of Consulting, Doug Howard. Click here for part 1: “There is No Such Thing as a Cash Flow Problem”.
Look for future PowerTips in this series on Cash Flow, “Improving Cash Flow by Improving Production”.