the economy is beginning to get brighter, growth is on the horizon. One likely cause of a severe cash shortage is the actual success of your business.
Success of your product can dramatically increase sales. This can cause a lack of available cash in your business as inventories, accounts payables and other expenses must expand quickly to deliver the goods to your customer.
Planning: To avoid a cash emergency, your strategic business plan must include realistic cash flow that details when the cash that drives your business will arrive and where that cash comes from. For example:
How much cash will come from direct sales?
Will you need to inject more capital in the meantime?
How stable and flexible is your personal financial condition to potentially meet the cash demands of this growth?
Will you need outside sources of capital such as bank financing or venture capital to cover the gap?
Have you kept your banker/investor advised of this potential growth/cash crunch?
Surviving: There are times where we find ourselves in survival mode. You can see that the cash will not cover the immediate obligations. Hopefully you have planned with contingencies in mind so you have set aside that cash cushion. It isn't always that easy. For example, if a major customer suddenly slows down on their payments - do the remaining balance of customer payments allow you to survive? If you find yourself in a situation, consider the following "emergency" solutions.
Immediately concentrate on collecting accounts receivables. (Planning ahead of the emergency is always best but crisis often motivate us to develop good policies and procedures around issues such as collections.)
Consider selling excess assets and/or inventory that is particularly slow-moving?
Factor your receivables. This is a good way for some businesses to free up cash because you collect immediately (for a cost, of course but you are in survival mode right now.)
Going to the bank for emergency cash is often unrealistic. This solution is a long-term, carefully planned and strategic maneuver. However, it doesn't hurt to talk with your banker about lines of credit based on confirmed orders.
Cash flow forecasting should be a regular part of your strategic planning. You can avoid most of the cash crunch crisis and being caught by surprise will (mostly) be avoided.
For assistance in planning and understanding your cash flow, get free one-on-one advising with the Small Business Development Center at COCC. 541-383-7290