No-one plans for it.
No-one's really prepared for it.
But, occasionally, business owners find themselves in a situation where cash flow – the lifeblood of any business – dries up.
Most businesses experience cash shortages from time to time. This was highlighted recently by the Xero Small Business Insights Report. It showed that, in February (on average the worst month of the year for cash), less than half of all businesses were cash flow positive.
Some businesses, however, find themselves in a cash flow crisis, where they experience an ongoing shortage of cash.
These businesses are often at the mercy of a vicious cycle. Their cash position is the result of a business performance issue that needs to be addressed. Trying, however, to implement change during a time of limited cash flow is extremely challenging.
One common scenario is that suppliers restrict trade. This can result in major disruptions to your trade, meaning declining sales, which exacerbates the pressure on the company’s cash flow.
This is a situation that can spiral out of control very quickly. At the extreme end, it’s why about 2,000 Australian businesses enter external administration every quarter, according to ASIC. Businesses fail for a number of reasons, but they ultimately close due to a lack of cash.
And it can be a frightening situation; one that very few business owners are equipped to manage. That’s because a cash flow crisis leaves little or no room for wrong decisions, but it also creates an environment that can severely hinder decision-making.
Like the relentless pressure from customers and suppliers. The risk for management is getting caught up in day-to-day operations and missing the big picture.
And then there’s the impact of emotional attachments – both business and personal. How do I pay my employees’ wages? What happens if we lose our home and need to start again?
This is why it’s often best to step back (as hard as that can be) when you’re facing a cash flow crisis. This is to ensure you get your priorities in order.
Take a breath and appreciate, firstly, that you’re not alone. As the numbers above show, there are many other companies experiencing the same pressures as yours. At the same time, there are people who can help you, such as advisors, accountants and organisations that specialise in challenging situations.
Then, take stock of your current position, consider the big picture and start planning your way forward.
There’s four steps to achieving that.
Start by taking some time to map out a daily 90-day cash flow forecast, if you haven’t already. Be as objective and accurate as you can and consider using an independent party to challenge your assumptions.
Then, make a list of your most critical suppliers. Rank them by priority based on both the amounts owed to each supplier and the importance of that supplier to meeting your customer commitments.
Use this projection and priority list to start communicating openly and transparently with your suppliers. Your ability to negotiate at this point could determine your future and there is nothing to be gained by silence or deception.
Finally, take care to negotiate achievable go-forward supply terms and repayment plans. Use the information you have to get the right outcome for your business. This might make negotiation harder, higher risk and more time consuming, but it’s better than not meeting your commitments and needing to request further support down the track.
Stepping back and planning the way forward can make all the difference when cash is tight. On the one hand, not having a clear plan dramatically increases the likelihood of failure. On the other, a clear plan can:
Improve the quality of interaction with clients, suppliers, creditors and advisors.
Improve outcomes for the business.
Give back a feeling of control.
Working through the steps above can help to solve one of the biggest issues faced by cash-poor businesses… time. It can free them from immediate cash flow pressures. In doing so, it can give them a chance to breathe and think about how to turn their businesses around.