By Jennifer Barnes, CEO of Optima Office, a firm that provides Fractional CFOs, COOs, Controllers and HR professionals for businesses.
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Whether your business is growing or going through a downturn, one of the potential hurdles to look out for is a cash shortage. Running out of cash can prevent you from taking advantage of growth opportunities and, if it prevents you from meeting payroll, it can cause catastrophic damage to the morale of your team. Making sure you have a consistently updated cash flow forecast can help you avoid shortages and plan ahead. You should know well in advance that you are going to have a cash crunch, and you can take many steps to avoid it.
Always make sure you have a backup plan, such as a line of credit, a traditional bank or SBA loan, one to three months’ cash in your savings account, investors ready to give you funds if needed or availability on your credit card as a worst-case scenario. If you are not able to get a line of credit or a traditional bank loan, then having alternative financing options would be the next best option. There are many companies that can offer you funds quickly at a higher rate or backed by your assets such as accounts receivable or inventory, which is a much better option than running out of money.
If you put together a cash flow forecast and find you will have some low periods where cash may be tight, here are three ways that your accounting team can help you get money in the door faster.
1. Get AR under control.
You are not the bank for your customers. Find a way to get your accounts receivable paid to you within 30 days. One quick tip is to print late invoices on pink paper. Accountants are not fans of pink paper, so print the physical invoice on it, even stamp it with a red “past due” stamp and physically mail the invoice to the customer.
This usually gets their accounting team’s attention quickly. Follow it up with a phone call, or worst case, get a collection company involved.
2. Look for ways that you can cut costs.
You can run a general ledger detail out of your accounting system and check for things that you may have been paying for that you are no longer using. Dues and subscriptions are one area where you can find yourself paying for things you may not be using.
Look at your office supplies or office services that you could get a better deal on. Are you paying for an HR service through the payroll company that charges you per employee, but you don’t really use it often? There are hourly HR services that may be better suited for you.
Lastly, look at the employees on your team. Are they fully utilized? Are they spending time doing more administrative work than billable work, or are they revenue-generating? You can easily take a look at what people are spending their time on and find ways to increase efficiency. You want people to be focused on the work at hand and be productive members of your team—especially if you are in a cash crunch.
3. Analyze your assets.
You might be surprised how often assets can become liabilities once they stop creating cash flow. If you aren’t seeing a return on investment, sell them off and focus on assets that provide a greater ROI. If your current liabilities are less than your current assets, meaning you have a negative current ratio, then you are considered insolvent. This is something you need to fix quickly.
You need to find a way to break even and increase your assets so that they are greater than your liabilities or your business could be in serious trouble.
Sometimes this also may mean you need to shift inventory. Storing excess inventory for long periods of time can get costly. Doing a flash sale or getting rid of inventory that isn’t working for you can be a good way to get money in the door that would otherwise take much longer to become liquid. Don’t hoard inventory because you think it is worth more if you are running out of cash. That inventory can become quite costly if you aren’t liquidating it fast enough.
If you ever wished you could see the future, you’re in luck! While you can never predict every possible outcome, the most likely financial futures are easy to identify with strong business books and an experienced financial team. Don’t wait until it is too late to fix your cash issues.