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Avoiding a Cash Flow Crisis

Maximizing profits and growth while also maintaining adequate cash flow is one of the most difficult challenges a young business faces, but it’s also one of the most important.
The old adage that “cash is king” has never been truer given today’s challenges for securing a funds or attracting investors.

To utilize capital to spur growth and avoid a cash flow crisis consider the following guidelines:

Prioritize cash flow

Determine how much cash your company should have on hand at all times. (A general rule of thumb: shoot for at least enough to cover operating expenses for three to six months.) Then make it a top priority to meet that goal week after week. Without cash, even a rapidly growing company won’t last long.

Invest

If you have more than enough cash-on-hand, consider using excess capital to grow your business. Fail to invest in capacity and you risk failing to meet growing demand. On the other hand, overestimate demand, invest too much capital or invest it poorly and you could kill your business entirely.

Spend wisely

It’s easy to rationalize spending money on infrastructure, equipment or new hires that will make doing business easier or more convenient, but if it won’t directly lead to more or new revenue flow, it’s probably too risky. Look at it this way: small and new businesses can usually only afford to spend on projects that will bring in more money than they cost. You don’t want to spend $100 to make $50.

Plan for accounts receivable growth

If you’re anticipating growth, be sure your billing department is prepared. As the number of clients increases, it becomes harder to keep close track of each account; without oversight, an increasing percentage of clients may become delinquent on payments. When this happens, cash flow can slow to a trickle even if business is good and sales are up. You might be surprised to learn some up-and-coming companies are profitable right until they file for bankruptcy, thanks to such accounts receivable problems.

Collect

Closely monitor which customers have outstanding debts, and develop a working plan of action for pursuing delinquent accounts. You don’t want to lose clients by being inappropriately aggressive. On the other hand, without payment you could lose your business. If your company consistently has problems collecting payments, consider changing your billing structure. That might mean requiring new clients to pay some money upfront, integrating a retainer or subscription fee or making payments due sooner after delivery.

Keep track

Consider implementing a financial dashboard system to assess your business’ cash flow on a weekly basis, and use what you learn to inform spending decisions. For example, if the amount of cash-on-hand is shrinking, examine the numbers to find out why. Are you spending too much on incidental costs? Are clients consistently late making payments? You can’t fix the problem until you identify it, and you can’t accurately identify it without data.

Even if your business is thriving, you still need to keep a watchful eye on cash flow. Fast-growing companies get into trouble when cash-on-hand dwindles, sometimes going from profitable businesses to bankrupt ones overnight. (For real world examples, check out these interesting case studies that recently appeared in Inc. Magazine.) Make cash a priority, and you can grow your business without going out of business.

Robyn Barrett is founder and managing member of FSW Funding, specializing in factor financing for small to mid-size companies. For more information, visit www.fswfunding.com.