Posts Tagged ‘cash flow crisis’
Managing Through a Cash Flow Crisis
June 5th, 2010
It’s not unusual for a small or medium sized business to go through a cash flow crisis at some time or another over their life of operation. In fact, for many businesses, survival of the bad times when cash is thin can even be considered a right of passage towards greater loan term success.
Why?
Because going through a very tough period when its hard to make ends meet can be mentally and emotionally draining, leaving a permanent imprint in your brain that 1) you never want to go through that again, 2) you have a much better understanding of how to manage cash flow due to the intensive focus that was required, and 3) you will not likely take cash flow management for granted any time soon.
The biggest challenge of dealing with a shortage of cash where there is less money coming in versus the demands for payment is being realistic with yourself as to what you’re working towards.
A cash flow crisis has to become an internal bridge financing scenario or you’re just putting off the enviable which is business failure.
If you aren’t trying to survive to get to a certain point where events will occur that will correct the problem, you may very well just be destroying your equity and throwing good money after bad.
So no matter how well you count the beans or negotiate with creditors, you can’t play musical chairs for a prolonged period of time with the people you owe money to. There has to be a defined turnaround point that you’re working towards otherwise how do you make cash flow trade offs or negotiate extended repayment terms.
Lack of a turnaround point somewhere on the near horizon will destroy your credit and credibility, both which are very hard to get back.
The key to managing through a cash flow is project far enough a head to a point where inflows are going to be able to meet or exceed outflows on an ongoing basis and work back from that point to figure out how you’re going to manage through with the funds available and any incremental funds you may be able to acquire.
By doing this, you now have a plan you can sell to your creditors. If you manage the heck out of weekly cash flow during the crisis, there is a good chance you can get to the otherside.
Just make sure you know where the other side versus staying alive long enough while hoping for something positive to happen.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingThe Recessionary Cash Flow Domino Effect | Business Financing Nightmare
October 8th, 2009
Cash Flow Problems In Recessions Are Typically Caused By a Domino Effect
The recession creates the obvious problem of less sales for your business, but even if you’re in a mostly recession proof business, or one experiencing only a modest down turn, beware of what I call the cash flow domino effect.
This is most relevant to businesses that are part of large supply chains, but it can happen to virtually any business, depending on the circumstances, and all these triggers can be like falling dominoes heading straight for your cash flow.
Trigger # 1. Someone in your supply chain or even a related supply chain gets into cash flow trouble. They can’t pay their bills, which impacts the cash flow of their suppliers. Now the suppliers customers will have their cash flow impacted and so on and so on down the line until the problem lands on your doorstep. The more cash flow problems originating in the supply chain, the greater the domino effect and the more likely of anyone being impacted.
Depending on where you sit in the chain relative to where the first domino falls will likely determine how this impacts you. In some industry this can be a complete company killer as business try to find ways to cover their operating costs and protect their credit until such time as the money starts flowing again.
Trigger #2. Your business is doing ok despite the recession and everything seems to be in hand when all of a sudden your bank calls your loans or puts you into what they call special loans. You’ve been a good customer for years and may have never missed a payment, but here they are with a knife to your throat.
Why would the bank do this?
Could be lots of reasons. They may feel that they are over exposed in your industry right now and want to strengthen their portfolio by calling in some loans they know they can get their money out of without losing money. You many be “offside” on one of your debt covenants which might be only marginal, but its an excuse to again reduce their exposure. Or based on the current conditions, they have significantly revalued your security and now believe to be under secured based on the amount you owe them.
Even if they don’t call your loans, they can trim back your limits and still wreck havoc with your cash flow. Remember that most operating credit is on demand and can be called or reduce on demand at any time for any reason.
Its just business, nothing personal.
But you still are in pretty good shape, so you’ll just do to another bank and get business financing some where else, right?
Trigger #3. In the middle of the recession, hardly any main stream lenders are lending any money and few are doing more than selectively helping out their existing clients. So even though you have a viable business, you can’t get a low cost loan. If you have assets to leverage, this could force you into more expensive asset based solutions until the recession blows over and hopefully you have the margins to cover the cost or you could become Trigger #1.
As you can see, the cycle can feed on itself and increase the potential negative impact on your cash flow.
As we get into the last quarter of 2009, the dominos have been starting to fall and are building momentum in some industries and geographies. How do I know? All I hear these days when I answer the phone is a business owner explaining which trigger he’s just been hit by.
More on what to do to protect your business cash flow in future posts.
Business Financing