Running a Business for Cash

 

When faced by a financial crisis a business owner must focus on the following three important areas:

 Reassessing the business model.

  1. Changing operations to reflect the new environment.
  2. Ensuring that enough cash is available.

In my last two posts I discussed the importance of a business model, and addressed the need for a business to make operational changes. Today I will focus on the topic of running the business for cash.

 No matter how profitable a business, running out cash will lead to insolvency. Keep in mind that unless you have a successful business model and the business is run effectively the business will eventually fail. Assuming the first two criteria exist, how do we manage a business from a cash perspective?

 Understanding the various elements of a balance sheet may be helpful.

 

  • If we carry debt it may be wise to convert debt to equity. Equity is more expensive but does not require repayment and is therefore cash saving. This is easier said than done because a bank will not ordinarily agree to this arrangement, but another type of lender might.
  • The proper use of debt may save cash. Long term debt should be used to acquire capital assets and short term debt should be used to finance working capital such as receivables, inventory and trade payables. Often business owners improperly use short term debt to finance capital acquisitions.
  • Consider refinancing short term debt into long term debt to conserve cash.
  • Examine your cash cycle. A cash cycle begins with your purchase of raw materials, storing the goods in inventory, processing them into finished products and selling them. At sale time we have a receivable but only when we are paid can we pay for our purchases. Until we collect from the buyer we don’t have the cash, and so the cycle resumes.
  •  Shorten the cash cycle. The sooner we collect the receivables the sooner we pay off our debts. The lower our inventory, the lower our cash requirements.
  • Shorten the sales cycle. Speed up the time from acquiring leads to converting them into paying clients.
  • Shorten the marketing campaign cycles. Speed up the sequences from marketing decisions to advertising to leads and ultimately to customers.
  • Shorten the finance cycle. Shorten the time for finance approval, or the time from when an order is received to the time of merchandise delivery.
  • Speed up the credit approval cycle.
  • Speed up the billing cycle. Send out an invoice the same day the work is done or goods shipped.
  • Shorten the collection cycle. Review the terms of sale. Call the customer as soon as the bill is past due.
  • Deposit all payments daily.
  • Delay paying select suppliers.
  • Minimize the inventory on hand.
  • Consider deferring planned capital expenditures.

 None of the above strategies alone may be the answer to the cash flow problem, however when combined their cumulative result may make the difference between survival and insolvency.