3 Levers To Pull to Avoid a Cash Crunch

Over the years, we have helped solve hundreds of cash crunches – and the biggest determinant of success was the amount of time we had until it hit.  The more time we had to solve the problem, the better able we were to avoid an upcoming situation.  While there are 3 main levers you can pull to impact your cash, the most important thing is to have a forward-looking Cash Flow Forecast that functions as an early warning system.

When working with clients, we recommend that they look ahead 6-8 weeks into the future on a week by week basis.  Why weekly?  As any business owner knows, not all weeks are created equal.  The first and third week of the month are the most expensive because most companies have rent due the first week and payroll usually falls in the 1st and 3rd weeks.  And if the uneven outflows weren’t enough, revenue never seems to match it.  Clients rarely care when an invoice is due – they always seem to believe they have until the end of the month to pay.  Even if your policy is net 10 or net 15.  And when clients get to the end of the month, they start that game they play of “which bills really needs to be paid”.  What this means for you is three things:

  • 1
    Expenses are predicable
  • 2
    Income is estimable
  • 3
    Mismatch is inevitable

Because of these three factors, creating a cash flow forecast that will tell you, as far in advance as possible, when you might have a cash crunch is crucial. 

 Once you have identified an upcoming cash crunch, you have options to help you deal with the looming problem.  Here is a checklist to help you walk through the problem to find the right solution for your company.

Credit

  • Credit Cards – While credit cards are one of the most expensive options when trying to finance a cash crunch, most people have them and they are relatively easy to obtain. If you have available credit, shift expenses to the card to avoid your crunch.
  • You can make a lower payment on your credit card if you have room to make sure needed charges won’t be declined.
  • Ask to have your credit limit raised.
  • Getting new credit isn’t as easy as it used to be, but it is fast. When you apply for most cards, you get an immediate answer.  Many companies will even give you a temporary number to make charges until your permanent card arrives in a week. 
  • Line of Credit – At CathCap, we believe every company should have a line of credit – whether you think you need it or not. Think of it as free insurance.  If you have a long relationship with your bank, you can usually get one within a week or so.  If you need to shop for a new bank, it might take a little longer.  Two things to note: If your business is small, you will probably have to put a personal guarantee on the LOC which means they will ask for all your personal financial information.  The second thing to note is that banks like to lend money to people who don’t need it.  So get a LOC as early as you can, use it to keep it current, and as your business grows, don’t be afraid to ask the bank to increase it.

Expenses

  • Cut expenses – what isn’t necessary for you to continue operating?
  • Move expenses – you can usually shift most bills and expenses.  But never touch payroll!
  • Your salary/draw/distributions – do you need all the money you planned on taking home.  Sometimes it’s better to leave money in the company – but only if it won’t cause too much hardship at home.

Revenue

  • What can you sell to solve the problem? We have found in most cases, there is usually an additional thing you can sell your clients that will make a big difference in the profitability of your company.  Think about every fast-food place in the world and the question they always ask, “Would you like fries with that?”  It worked for them, and it can work for you too.

As you can see, there are a number of levers you can pull to help with a cash crunch.  The solution is usually a mixture – there isn’t a single magic bullet.