Cash flow is the life blood of a business. It's required to buy inventory, pay employees, secure financing, and ultimately keep the motor running. Unfortunately, its role is too often misunderstood.
According to a U.S. Bank study, 82 percent of failed small businesses attribute their failure to poor cash flow management, or poor understanding of how cash flow contributes to a healthy business. According to one analyst who studied why 101 startups failed, 29 percent failed because they ran out of cash.
If the evolution of the Coronavirus pandemic has required your business, like so many others, to shift into survival mode, your main objectives now are to pay out cash later and receive cash sooner. Here are four ways to do it.
Find out if you qualify for emergency funding.
The U.S. Small Business Administration (SBA) provides federal disaster loan assistance for businesses and private nonprofits. In the case of Coronavirus, the SBA is offering designated states and territories low-interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of Covid-19.
These loans offer up to $2 million in assistance and can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing. The loans can be used to pay fixed debts, payroll, accounts payable, and other bills that can't be paid because of the disaster's impact. For small businesses, the interest rate is 3.75 percent; for nonprofits, it's 2.75 percent. A list of eligible disaster areas is kept updated, and loan applicants are encouraged to apply online.
Make productive staffing decisions.
Take your business' temperature by looking at your cash balance in terms of how many payrolls you can fund if revenue dries up. Your employees are your most valuable asset, so while downsizing may seem like an inevitable conclusion, consider the alternatives. Before you reduce salaries, figure out whether you can reduce work hours instead. Asking someone to work the same amount for less money can cause resentment and decrease productivity. This approach will have the same financial impact but foster a more productive, agreeable transition. Other ways to cut workforce costs include eliminating overtime, voluntary retirement offers, and temporarily placing full-time employees on part-time status.
The short- and long-term costs of layoffs can end up causing a company more harm than good. In terms of direct costs, employers have to pay out severance and benefits packages, accrued vacation, and, in some cases, fees associated with outplacement services. Other indirect costs that make a significant dent, though they are harder to quantify as quickly, include lost knowledge, skills, and customer relationships, and lowered employee morale and productivity.
Negotiate better payable terms.
Get your vendors on the phone to discuss extended payment terms--especially larger vendors, which are likely sitting on far more cash than middle-market companies. Having cash in your account for two additional weeks with 45-day terms compared to 30-day terms could mean avoiding a layoff or even keeping the lights on.
Another option to discuss is discounts. If your vendor will not extend payment terms, find out if they will grant you a small discount for paying early. A one or two percent discount for paying within 10 days instead of 30 is common in many industries.
Not all vendors will be able to accommodate these requests, but those that can may be obliged to do so with the understanding that it is in the interest of securing the long-term partnership and avoiding a canceled contract.
When the economy is booming, letting invoices go days or even weeks past due doesn't always seem like a big deal. But now is no time to be passive, because the funds you're not being paid are likely going to another collector who's making more noise.
Gently remind the client of any penalties they may face in accordance with your company policy on late payments. Having a direct, open discussion may provide you with a better understanding of why the payment was late, which could lead to a solution to avoid the issue in the future. You might find this level of transparency even strengthens your business relationship.
Keeping your business afloat during an economic crisis is challenging, but it can be done. Setting realistic goals, approaching all decisions with caution, and communicating openly and honestly with employees and partners will help get you through it.