Good News: You Can Survive a Temporary Cash Crunch
Bad news: you’ve been hit with a surprisingly high tax bill this year. Good news: That means profits were higher than expected!
More bad news: The cash drain after paying the taxman may have triggered a cash crunch. More good news: Several mechanisms exist for surviving this temporary crunch.
In this scenario, the solution starts with a well-crafted cash flow projection. The forecast quantifies the impact of your survival measures.
Predict how new initiatives alter your cash flow: Making cuts in operating expenses is the first tool in the entrepreneur’s kit. But don’t engage in a broad slash-and-burn strategy. Make prudent reductions that don’t cripple ongoing sales and service. A key area for saving precious cash is delaying capital expenditures, such as new equipment or upgrades to existing machinery.
Evaluate accounts receivable and inventory: When money conditions are tight, this step is vital. Needed cash can be generated by offering discounts to customers for paying early or by selling excess inventory at reduced prices.
Make sure these are limited-time offers rather than permanent changes to your business policy. And convey the message that you’re offering rewards to customers, not that you’re experiencing cash flow difficulties.
Examine the liability side of operations: Look into restructuring debt with lower monthly payments. Ask for concessions—such as extended payment terms—from vendors. Communicating frankly with creditors is the best way to show that you value the continuing relationship and want to assure them that they will be paid. This is the good news they want to hear.