Cash is the lifeblood of business. Without it a company will die. Many companies, especially those that are growing rapidly, face situations from time to time that result in cash shortages that threaten their very survival. For example, if a company finds itself in a situation where it is not able to meet payroll, there is a major problem. Sometimes those situations are the result of factors beyond a company’s control. For example, something may be happening in the industry that is temporary and unusual but that adversely impacts everyone in the industry. Here is a case in point. Phoenix hosted the Super Bowl this year and in preparation for that major event many big sponsors “pulled ahead” spending they would otherwise have made more evenly throughout Q1 2015. Those funds got spent in December, 2014 and January, 2015 instead. The result was that orders that would normally have been placed in February and March were severely diminished. And, that left many vendors who were counting on the normal pattern of spending with cash problems late in the quarter that stressed their cash reserves to the breaking point.
Here’s another not-so-uncommon event that adversely impacts cash flow. A new entrant to a market offers loss-leading ultra-low prices in order to buy market share. That has an obvious and adverse impact on the existing companies in the market and that often spells cash flow trouble.
So, what do you do when your company is caught in this kind of squeeze?
The first is most important strategy is to have a finance professional such as a B2B CFO® partner on your team. That professional will help you anticipate and plan for the possibility of a cash crunch that is not of your making before it actually happens.
Second, have a working capital line of credit in place with a bank that truly acts as your business partner. The purpose of such a loan is to make capital available to you when times are lean. But, note that some banks are better business partners than others. Your B2B CFO® partner can find one that is right for you. Then, maintain a close and open relationship with your primary banker and the person to whom he/she reports at the bank. A good banking relationship can help you weather many storms as long as the relationship is open, honest, and based on trust. Be candid with your banker about problems when they arise but also help him/her understand where your company is headed in the longer term. Help the banker understand your projected revenues and cash flow along with existing and anticipated purchase orders and opportunities. Also be candid about challenges you are facing.
If you don’t already have a budget, create one with the input of all the major players in the company and manage your company to it. Complement the budget by creating a process for forecasting revenues and cash flow on a monthly basis and share these with your banker. Compare monthly forecasts with the budget and understand major differences to it.
Last, but not least, establish relationships with other sources of short term money that you can call upon when necessary. But, make sure those sources are compatible with the terms and conditions (the “covenants”, if you will) of your primary bank loan. Use those sources when absolutely necessary. They are more expensive than bank money but sometimes are life-savers. Look to your B2B CFO® partner to help you find and invoke those other sources most effectively.