7 Questions to Ask When Facing a Cash Crunch

When is the best time to plant a tree?  Ten years ago.  And when is the next best time? Today.   – Confucius

I agree, and the same applies to cash crunches.  The best time to avoid a cash crunch is well before you find yourself in one.  But how do you know one is coming?  Most small companies just check their bank balance and figure out they can’t make payroll.  But there isn’t a lot you can do about it at that point.

Best practice is to have a cash flow forecast that tells you how much money you are going to have at the end of each week.  For the next six to eight weeks.  That way you can make plans and avoid a cash crunch that is looming.

We had a client in Oregon a few years ago and I was going over his Cash Flow Forecast with him.  I looked out 7 weeks and there was a big red negative number.  My client started to panic a little, but once he calmed down, we started to go through options.

Can we use our Line of Credit (LOC) and transfer the needed funds?

Unfortunately, Dan didn’t have a LOC so that option was out. 

Are there any unnecessary expenses that we can cut that will resolve the problem?

Dan and I looked into this during previous cash crunches and he was running pretty lean. There wasn’t anything he could cut that would solve this particular problem.

Can we move a big bill out a week and solve the problem?
Some big bills can be moved. For example, your landlord is usually pretty understanding if rent comes in a few days later than usual. That didn’t work for Dan – the negative number was too large. We would have needed to move payroll and that is usually the last thing you want to do. Your employees need to feel confident that they are going to get paid or they will start looking for a new job.

Do we have room on the credit card to just pay the minimum and try and catch up over the next month or two?

Dan’s credit cards were pretty much maxed out and had we only paid the minimum, a lot charges for bills and services he needed to keep running would have been declined. So that wasn’t an option..

Can we apply for a LOC in time?

We had 7 weeks which is usually enough time, but we had tried applying for one a few months earlier and had been rejected because of some things that had happened the previous year that made his financials look not very appealing.

By this time my client was really getting worried.  We had gone through all the options that involved expenses and credit.  But the list wasn’t exhausted yet.

Can you (Dan) forgo your salary or draws this month?

This is always a pretty radical option.  We believe that if the owner of the firm doesn’t have enough cash at home, they aren’t going to make solid business choices.  I consider this a last resort as we had one other option that I wanted to look at before this.

Is there a new product or service that you can quickly start selling that will balance the loss you are facing?

This turned out to be the key question with Dan.  He and his wife/business partner had been thinking about a new service.  They had been keeping notes about it in a blue binder.  They took out the blue binder, made some calls, fished building out a few key points and then started selling. 

A week later when we talked, the cash crunch was gone from his Cash Flow Forecast.  The Blue Binder Project was a hit with his clients.  And what I love about this story is the far-reaching impact the Blue Binder Project had on not only his business, but his clients lives and even the Court System.  The Blue Binder Project was a program taught by a licensed counsel that helped people who had been charged with DUI dig deep to find the reasons why they drink and help them towards sobriety.  These people were able to take their graduation certificate to their sentencing and the judges took that into consideration when meting out their punishment.  This was such a great service to provide – for the clients, their families, and frankly, for all the people on the road in Oregon.  Dan took something that had been sitting on a shelf and changed lives – and eradicated his cash crunch.