Managing cash flow is always a tricky balancing act. You need money to pay the bills on time and prevent additional fees or debt. While idle cash can accrue some interest, the real returns are from investment. When unspent, you’re wasting the chance to put that money to work growing your business or clearing debts.
Excess cash reduces your company’s overall return on its assets. Missing a payment has costs, but excess cash has opportunity costs.
It’s easy to have a misstep trying to balance this trade-off. Think overambition, a misjudged revenue forecast, an unexpected bill, a drop in income, interest rate rises on your debt. And how about a once-in-a-century pandemic?
There are many ways to suddenly find yourself with more money leaving the business than coming in.
Unfortunately, in the financial high wire act businesses perform, most of us don’t have a safety net. So, what do you do when a crisis strikes, and you’re scrambling to find funds and make essential payments?
Cash flow crisis planning
In order to not rack up a mountain of debt and survive this predicament, you need to accurately assess your situation. How deep is the hole you’re in? And how do you prevent it from getting deeper?
Some initial steps to consider include:
- Accelerating your accounts receivable.
- Negotiating lower interest rates.
- Finding additional income (e.g. Adjust the business plan to increase margins, sell non-essential assets).
- Exploring borrowing options or raising new investment.
- Eliminating or reducing non-essential expenses.
- Assessing and prioritizing the payments you need to make.
Top priority payments
Not all bills are created equally. Although missing payments can have negative consequences, some are worse than others, and you need to know which to prioritize as funds become available.
Thoroughly go through your accounts, books, or the bill payment software you use to understand the obligations you’ve made, how much you owe, the terms of the payment, when it’s due, or how overdue it is.
The first category at the very top of your “have to pay” list should be the non-negotiable bills that will put you out of business or potentially worse (litigation) if ignored.
Take the following into consideration:
- Taxes aren’t yours. That money belongs to the government. Failure to meet your tax bill incurs hefty penalties or the potential for the government to seize control of parts (equipment, property, etc.) or all of your business. You may even be charged as a criminal for missing tax payments.
- Not paying the payroll means you won’t have employees for long. Also, in many instances, there are laws imposing penalties on businesses paying their workforce late.
- Missing rent payments can lead you to lose the lease and having nowhere to operate your business.
- Your business cannot work without utilities like electricity, internet, water, heating/cooling, etc.
- Generally, aged payables count as any bill 60 days or more overdue. Continuing not to pay these jeopardize your credit score and can even result in creditors filing a lawsuit against you.
- Secured debt against your property or other assets can lead to severe losses if unpaid. Clearing these debts can also allow you to leverage or liquidate the assets they are secured against.
Focusing on these non-negotiable bills can offer a little breathing room, ensuring you can keep the business alive while making your way through the crisis.
Plenty of other bills are vital to your business without being quite as important as keeping the lights on.
At the top of them are any bills to major vendors. You may have vendors providing unique products integral to your business that are impossible to source elsewhere. If this is the case, they should be considered top priorities and grouped with the bills above.
Other bills to consider include:
- Personally liable debt: Debt where payment is guaranteed against your own assets beyond the business finances.
- Insurance premiums: These need to be paid to ensure you don’t operate with additional risks for extended periods.
- Larger bills: The bills that will have a significant impact on your credit score if unpaid for long periods.
- Credit card debt: Critical, although usually unsecured the premiums can add up quickly.
Tips to help get you through the crisis
- Make a list of minimum payments for your bills to learn what you absolutely need to pay out in order to continue operating your business in the short term.
- Once you start making payments on unsecured debt, order them by interest rate and pay off your high-interest debt first.
- You’re not out of the woods yet, as you start to clear the top priority debt – rollover money set aside for payments until you have cleared the list and can get back to normal operations.
Take a deep breath and get to work
A cash flow crisis is incredibly stressful. It can feel like the beginning of the end, and estimates suggest that 82% of small business failures are due to cash flow mismanagement. However, by staying attentive to your cash flow and understanding which bills to prioritize, you can minimize the consequences of delayed payments and get your company back to a solid financial footing.
Alton Clarke was born and raised in Syracuse. He has written for MSNBC, The Business Insider and Passport Magazine. In regards to academics, Alton earned a degree from St. John’s University. Alton covers entertainment and culture stories here at Diving daily.