Nearly every growing company hits a cash crunch at one time or another. A glitch in product development eats up time and money. Sales rise faster than the company can finance them. Or maybe there's a pandemic, which puts all sorts of pressure on many companies' cash. Revenue falls. Receivables are hard to collect. Banks hesitate to lend. 

Financial folks will offer all sorts of advice to entrepreneurs facing a cash crunch, but much of it is either uninspired or downright counterproductive: Look for other lenders or investors. (Good luck). Stretch out your payables and lean hard on your customers to pay up. (In other words, alienate the people your company depends on.) Cut your labor costs by laying people off. (Hope you can hire them back when the time comes.)

There's a better way to handle this issue. Some years ago, when a company called People Resources was facing an acute cash crunch, its founder, Janet Mug, came up with a strategy that won everyone over.

People Resources offered medical and psychological health services to its corporate clients. Mug and many of her staff were registered nurses. The firm had grown slowly but steadily, and Mug had provided loans from her personal savings to keep it afloat. 

Now, however, she was tapped out. And People Resources' lack of cash was threatening its future. One of us (Bill) offered to work with her, and together they mapped out a plan.

First, they spoke to dozens of people connected to the company. The purpose was to identify strengths and weaknesses, and indeed it did. Customers raved about the services. Employees and managers spoke of their passion for providing good care. But then there were the financials, which no one but Janet and the company's controller had ever seen. They showed steady growth with thin margins, requiring more and more cash from Janet.

Next, Bill and Janet pulled together a meeting with the controller and eight team members, most of them nurses. After reviewing the data, they asked the team members to answer a series of questions:

  • What would indicate that People Resources was winning in the coming year? Everyone agreed that the company's primary purpose was to serve people and change their lives. The more lives they touched, the more the company was winning.
  • That raised the second question: How could the company improve more lives? The team members knew that there was a lot of demand for People Resources' services. So they needed to hire more clinicians.
  • And what was stopping People Resources from hiring more clinicians? "Janet!" the members said. "She won't let us hire anybody else." 
  • Why was Janet reluctant to hire more clinicians? Janet answered this directly. She had put every dime she had into the company. She couldn't put in any more, and the company wasn't generating any extra cash. So adding more staff wasn't an option.
  • The final question to the group was this: Are you serious about serving more patients and changing more lives? If so, you need to come up with ways for the company to become more profitable, so it can generate the cash it needs to grow.

At this point, Janet sighed with relief. Suddenly she wasn't the only one thinking about how to generate more cash. She had partners to help carry the load. The group discussed the options and came up with the idea of a scoreboard that tracked revenue per clinician. If this number rose, the company's profitability would increase as well. The increased profit would generate the cash needed for expansion.

So People Resources began tracking that key number, updating the scoreboard each week. Team members came up with a variety of ideas, such as scheduling appointments more efficiently and offering new services based on patient requests. Pretty soon, revenue per clinician was rising. Profit and cash rose, too. Over time, Janet began hiring more clinicians and paying off some of the company's debts. 

People Resources has since been sold to a larger company. But it would never have made it to a sale if it hadn't survived that cash crunch. Ironically, the solution didn't lie with tighter financial management, let alone with cutting labor costs. It lay in treating employees as trusted partners--people who could help turn the business around.