How to Handle a Cash Flow Crisis

Even with good cash flow planning, unexpected events can cause a business to face a cash flow crisis.  This discussion is not in lieu of cash flow planning but addresses cash flow in response to disruptive situations:  higher than expected growth, loss of a significant customer, unexpected economic downturn or acts of God.

There are some obvious ways to improve cash flow I’m sure you’re familiar with.  In the heat of the moment, these common approaches to a cash flow crisis all seem like good alternatives.  Let’s examine common cash flow improvement options and consequences–of course, in some desperate situations consequences don’t matter and you’re just trying to survive.  But remember stepping back and considering alternatives and possible consequences will serve you in the long run.

The most significant thing you can do in a tight cash flow situation is to keep the lines of communication open with your vendors, team, and bank.  Then project your cash flow weekly with a 90-day forecast and manage it daily so you know what you can promise to pay.  Make it a policy to keep those promises – trust is important.

Inaction in a cash flow crisis is the worst response. 

Prioritize the Use of Cash: Slow Payments to Vendors is Often the First Choice

Slowing payments to vendors is effective in the short run, especially if the cash difficulty is an anomaly or you expect it to be resolved quickly.  Keep in mind though, slowing your payments to vendors may have consequences. You may face limited ability to get product in the future. The vendor may also hold needed parts hostage and only release them in exchange for reductions in the balance outstanding (ex. You need 2 of the item and they demand payment for 5 reducing their past due balance exposure).  This method, especially without communication may breach trust and disrupt future business activity.

Alternatives to consider:

• Negotiating Extended Terms – If you are a significant customer to a large vendor, you may be able to negotiate extended terms. For example, if your vendor normally demands payment in 30 days, you may be able to negotiate for 90-day terms. This approach works if the vendor needs your business AND they’re large enough to absorb the cash flow difference on the payment terms.
  Negotiating extended terms will also work in cases of very small customers to large vendors:  the change in your payment terms will not have a significant impact.  However, your ability to negotiate is very limited. Extending terms with too many small customers may cause the vendor to face the same issues you’re dealing with now, weakening their ability to serve you in the future.
• Negotiating a Moratorium – Can they hold your past due balance if you pay the current invoices regularly? If you are sure you can pay current bills on time, this is a good negotiating tool with smaller vendors. They may be reluctant to sever the relationship, especially, if you are a long-term loyal customer.  Negotiating a moratorium may require a good faith payment or a note defining the payment terms of the past due balance.
• Partial Payments to Vendors – Often providing partial (good faith) payments to vendors will help in negotiations.
• Pay-off Small Vendors – The smaller vendors tend to be much more persistent in their collections activities as your bill is significant to their own cash flow. As a result, negotiating with them may take up a significant and disproportionate amount of your time, keeping you from activities that could enhance cash flow in other ways.  Arranging to pay off a handful of small vendors will free you up to focus on other cash building options.

Increase Cash Flow from Customers

Often in a dire cash crisis, the focus shifts to not spending money, but this conservation on your A/P side only goes so far.  It’s important to prioritize A/R as well: how can you improve cash flow from customers without disrupting the relationship?

• Increase Collections Efforts – You need to become the “squeaky wheel.” I know from personal experience this is an effective strategy, on both the customer and the vendor side.  The more persistent you are, the more likely you’ll be to collect.  Do you have an employee who can focus on this project?  The collection approach doesn’t need to be harsh, but it requires persistence.  It’s critical to begin the process one day after the balance due date and create a process to ensure continued pursuit.
• Apply the Same Tactics Used with Vendors – Are you the small vendor who should be paid? Will you accept a moratorium? Can you get a “good faith payment?”  As you know, sometimes when customers get far behind in payments and can’t see a way out, they choose to ignore your bills.  Offer your customers an alternative. As above, you should request a written agreement for the past due balance.
• Use Small Claims Court – This may be an alternative even for customers you wish to continue doing business with. Typically, small claims court is available for a nominal fee, especially if you are willing to assign an internal person to pursue the case.  It’s not too intimidating for customers and the resulting judgment can be sold (granted at a relatively deep discount but selling will generate cash).
• Consider Retainers – If you’re a service business and do recurring work for customers, consider using a flat monthly charge for your services rather than hourly rates. This will make cash flow planning steady and simpler for you and your customer.
• Add Progress Billing – If you work on longer projects with definable completion points (deliverables), consider billing contingent on how much of the project is completed and when the deliverables are met.
• Use Deposits – If there are upfront out-of-pocket costs or pre-work on sales, initiate the collection of deposits. Whether this is industry standard or not, if you have good customer relationships, deposits are an option.  In situations where you are paid over time (progress billing), instead of giving full credit for the deposit on the first invoice, allocate a portion of the deposit toward each invoice.
• Use a Collections Agency – Collections Agency fees may be a bit high, but if you can collect on a delinquent account it may be worth the price.
• Factoring (Selling Receivables) – I have a personal aversion to this approach and would classify factoring as an absolute last resort. It’s like a “payday loan” — extremely expensive and once cash flow improves, hard to escape.  If you’re considering factoring, consider all other options first.
• Use a Bank Letter of Credit – This will ease any timing issues with customer collections and vendor payments. Include this source as you forecast your cash flow.
• Outside Accounts Receivable Management – Often in a cash flow crisis there is no time to handle accounts receivable and pursue collections internally. Consider hiring an outside firm for a fixed fee to supplement your internal staff.  Pay them in full each month to assure continued service.

 

Generating Cash Flow from Miscellaneous Activities

Do you have assets that can be sold?  There are many platforms to sell items, such as eBay, Craigslist, and Amazon, where you can convert unused assets into cash.  

Some unused assets to consider:

• Inventory – I have walked through many warehouses where the product is covered in inches of dust. inches This is one way to for identify slow-moving inventory. A better option is within a system that identifies usage and quantities on hand.  Decide which inventory items are “excess” and convert them to cash.  A hidden benefit may be a reduction in storage space costs, personal property taxes, insurance and other incidentals.
• Property, Plant & Equipment – Look closely at your equipment and determine if any can be sold. Consider that sometimes the parts are more valuable than the whole.  Are replacement parts hard to find for that unusable piece of equipment– could it be torn down and its parts sold? Do you have equipment used infrequently that you could convert to cash and opt to rent when needed?

Can You Handle the Cash Flow Crisis by Getting Creative with Decision-Making?

Can you negotiate to restructure your debt?  This might include extending the amortization period or refinancing a balloon payment.  Do you have fully paid off assets to refinance and generate cash?

Are you considering buying a piece of equipment that you will use only occasionally? Could you subcontract that work or rent the equipment until you get on your feet?

Do you have an open position that you can delay filling by using your current team?  Or did you hire “in anticipation” of an upswing? Are you holding non-performers, and do you need to revamp your current employee structure?

If you have excess space, is your rent at above current market rate and if so, can you renegotiate? If your rent is below, would your landlord like to have the extra space to lock-in a higher paying tenant.

What About Your Team?

Engage your team to help you reduce expenses.  Your sales team may have methods to generate short-term business or suggest other ideas to increase pipeline quickly. Your team knows the details and nuances of your business, and they may think of outside-the-box ideas to help solve the problem. It’s unlikely they’re the cause of the current cash flow crisis and they’re likely under a lot of stress.  Don’t fool yourself into thinking they don’t know what is going on or feel the crunch.  Here are some tips to mitigate employee stress.

• Give Them a Break – In many times of cash flow crisis, it’s the accounts payable clerk or the accountant bearing the brunt of the difficult calls. In a past life, I had a situation where the Accounts Payable clerk handled the calls. She was both feeling the stress as well as feeling underpaid for the workload.  My solution was to give her two mornings a week where she could record a detailed voice message and not answer the phone.  That alone improved her attitude and productivity.  Think about how you can offer respite from the deluge of calls.
• Keep Commitments — Rank Doesn’t Matter – In the same company, we met weekly to determine what steps were critical in completing an order and shipping (you know, that’s how we get cash in). We reviewed promised payments from our customers and literally allocated EVERY dollar to a vendor.  The accounts payable clerk then knew who she could promise payment.  Then sometime in midweek, an unallocated vendor would call and whine to a “higher up,” typically the VP of Purchasing, who would cave and promise a payment.  You can imagine the repercussions.  We lost credibility with those promised, making on-going business even harder.  This behavior had to be squelched.
• Keep Key Players in the Loop – The weekly meeting was not only attended by managers but those involved in paying vendors: VPs of Purchasing and Manufacturing, the Controller, the Accounts Payable Clerk and depending on the week, others as well.
• Recognize the Front Line – I am always amazed at the vendors or customers who will call and abuse a team member of mine and yet, when they get to me, the caller is soft-spoken and polite. Keep in mind that virtually anyone in the company who answers the phone may be bombarded by an irate vendor.  Make sure employees know that they don’t have to take abuse.  Give them a script.  Our team could hang up on an irate person after saying three times, “We need to take this conversation to a civil level or I will need to hang up.”

Stress can create monsters of us all.  Your team is not the enemy and faces difficult situations as well.  While it is incredibly difficult, try to keep everyone on the same page and work to mitigate additional stressors like an out-of-control leader.

Keeping your moral compass working, keeping lines of communication open and supporting your team will hopefully get you through the immediate cash flow crisis and back on track.

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