Gaps in Cash Flow happen from time to time in running a business. In a perfect world, you would do one twelfth of your business every month, customers would always pay on time, and Santa Claus would bring me a red Ferrari. Since we do not live in that perfect world (or at least I don’t) we do cash forecasts to make sure we can meet payroll and our other obligations. Sometimes, cash receipts do not meet expectations, or unexpected cash disbursements happen, and we are faced with a shortfall in cash, or what I call a cash flow gap.
When this happens, having a well tested forecast of cash flow to rely on can help you to select the right method to get through the gap. It will also help to predict the depth and length of the gap. You can use this information to confidently communicate with your bank, suppliers, employees and other stakeholders about your cash position.
Here is a quick list of ideas to look at to help you bridge the gap.
1. Look for lazy assets. Do you have inventory that is old or obsolete that you can move without destroying the sales flow of current products? Do you have equipment you no longer use but have been keeping because “you never know when you might need it?” Convert lazy assets to cash and never look back.
2. Any personal assets available to loan to the business or use as collateral are an easy means to fill the gap.
3. When personal assets are not available, family and friends are a great source of fast money to get through a tough time.
4. Customers may be enticed to pay early with a discount or some other premium but be careful not to scare them into seeking a more stable supplier.
5. If sales and payroll are down, look at your Workers’ Compensation and Liability Insurance policies for possible refunds.
6. If taxable income will be lower than prior years, cut back on regular tax payments and consider applying for a refund of payments already made for the current year.
At this point, assuming your bank is already at their lending limit with you, the options become tougher.
7. Receivables can be factored. This adds to the cost, but puts the money in your account earlier. Be aware that this method does not create new money, it just moves the collection date ahead by 30 days or so.
8. Vendor payments can be stretched, but that causes all kind of other issues if you are not careful. Contact the big vendors, tell your story and ask for extended terms. The last thing you need is for vendors to put you on COD for future deliveries. Like factoring receivables, this is a temporary fix and only really benefits the first 30 days or so of the gap.
9. Check with your local Economic Development resources. There sometimes is money available in loans or grants for job creation or retention. This is often a slow process, but can be a great shot in the arm to your business.
10. You can always ask employees to help in the form of a loan, investment in stock or a pay cut. Where pay cuts are unavoidable, be sure that management exhibits leadership by taking the first and biggest cuts.
11. Every community seems to have someone who is willing to loan or invest money where banks will not. There are always fees and rates can be high, but this can create money to get through a gap.
12. Selling a piece of the company can bring in some much needed cash. But be aware, a host of other issues can come with this option, most of which complicate the decision making processes in your business and may affect how you run your company.
Again, having confidence in the depth and length of the gap is key to using the best solution to filling the gap. Banks like to see a 13 week cash flow projection. Use whatever forecasting tool you are most comfortable with because anytime you ask for money, directly or indirectly, there is one questions that you will get back every time: “How are you going to pay this back?” Answering that question quickly with fact based assumptions that make sense will make getting to ‘yes’ much easier.
Do you have lazy assets or other potential cash generators that you just don’t want to pull the trigger on? Go ahead and do it! Selling off those sacred cows can often be the quickest source of cash, and once they are dealt with, you will be glad you did.