Coolidge Wall Co., L.P.A.
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Is Your Business Experiencing a Cash Flow Shortage?

Running a business is hard. There will be times that every business owner will face an aggravated customer, an uncooperative vendor, a disgruntled employee or a difficult economic challenge. All of these situations are manageable, and the challenges can be overcome.

Economic Distress Can be Managed and Overcome

It is not uncommon for businesses to experience times of economic distress and cash shortfalls. A cash flow shortage could be caused by late paying customers, a need for increased inventory to support growth or a structural imbalance between revenue and expenses. A cash flow shortage can be extremely stressful to a business owner. The key for a business owner managing through a cash shortfall is to develop and manage to a cash flow plan.

Utilize a Cash Flow Plan

Business owners should have a tool to manage their cash on a regular basis. The frequency of that cash management may be daily, weekly or monthly depending on the specific situation. A simple spreadsheet can help a business track expected inflows and known outflows. The tool can give a business owner insight into when the cash balance of the business will be adequate or deficient and the tool can help avert a cash crisis. The tool can assist the business owner in prioritizing the use of cash while maintaining the stability of the business.

Prioritizing who gets paid and when they get paid is critical to the cash flow plan. Payments must be prioritized in the context of the most critical needs of the business and must be based on continued survival. A prioritized list of payments could include: (i) sales tax, payroll taxes and other governmental liabilities; (ii) payroll; (iii) critical vendors; (iv) debt obligations; (v) real property leases; (vi) health insurance; and (vii) repairs and maintenance expenses.

Sample Cash Flow Model:

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Communicate with Vendors and Lenders

A shortage of cash can create a stressful relationship with vendors who are not getting paid. Business owners must maintain an open dialogue with vendors. While vendors do not like not getting paid, they detest not being able to talk to their customers who owe them money. Communicating with vendors regarding on going cash flow plans will give the vendor some comfort that the financial challenge is acknowledged and the vendor will eventually get paid.

In addition to communicating with vendors, the business owner must have an open dialogue with their lenders including banks and finance companies. A lender may be willing to suspend or reduce regular payment amounts for some period of time, while the business works through a temporary cash crunch.

Possible Solutions to Increase Cash Flow

There are a number of options that a business owner may have to increase cash flow. They could include:

  • Offer a discount to customers for early payment
  • Negotiate longer payment terms with vendors
  • Investor/Partner short term cash contribution or loan
  • Increase the available line of credit from a bank for a specific period of time
  • Reduce or suspend payments on loans and leases with the approval of the creditor
  • Communicate to certain vendors that you need to suspend payments for some period

There are specialty lenders willing to fund short term business loans based on accounts receivable, inventory, credit card receipts and/or personal guarantees by the business owner. However, the interest rates may be expensive and the "cash sweep" process that these lenders employ can put additional cash flow pressure on the business. While the funds available from these lenders may be appealing, the business owner must understand the details of the cost, allocation of risk and the repayment stipulations.

Summary

Running a business is hard but not impossible. A business owner should stay ahead of their cash flow requirements to minimize the chance of a cash crisis. Cash flow can be managed with a cash flow plan, pragmatism and communication.

This information should not be considered a comprehensive discussion of cash flow management, legal advice, or all that a business owner should consider in managing their business. Should you wish to discuss cash flow management, contact an attorney who can provide guidance tailored to your specific situation.

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