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Dealing with a Cash flow crisis

Get Creative. Be Diligent.

Bizspace Bizspace

Get Creative. Be Diligent.

If you see a crunch coming, barter, liquidate inventory, ask clients for advance payments, and renegotiate vendor relationships, just for starters

If cash is king, the castle keep is looking pretty bare for entrepreneurs, grappling with a recession, a credit crisis, and the fallout from an unprecedented series of bank meltdowns. An October survey of business owners by PNC Financial Services Group (PNC) found 68% expected a cash crunch in the coming six months, up from 48% a year ago. Even businesses that are adding customers and shipping more product can be at risk if cash inflows lag outflows.

Naturally, you want to bill immediately, collect diligently, and enforce a credit policy that filters out undesirable customers. If that still isn't enough, turnaround experts have a few more ideas for surviving a cash crisis in uncertain times.


  1. Investigate your lender. Few banks are increasing lines of credit, but if your financial institution itself is in bad shape, "open up discussions immediately," says Allan Tepper, a CPA and finance consultant to small companies. "If they're not there for you, consider alternative lenders." You might also approach a credit union: Their lending is up 36% over last year.
  2. Forewarned is forearmed. Get a cash-flow projection from your bookkeeper or accountant (or use accounting software to generate a simple one yourself) each month. From there, you can micromanage your cash position to get ahead of any huge payments. You could ask healthy customers to pay in 10 days rather than 30, in return for a discount. If you can afford it, offer 5% off for payment within five days (instead of the customary 2% for payment within 10 days), says Larry Rice, a CPA and director of strategic consulting with Rodman & Rodman in Newton, Mass. Just make sure the payment date is clear on the invoice.
  3. Get payments in advance, and by credit card. Most clients will resist paying up front, but a few may prefer to pay a fixed amount per month rather than getting sandbagged with a large bill—and a few clients may be all you need. You can speed things up by asking for payment by credit card. Even in businesses that have not traditionally kept their customers' credit cards on file, it's becoming increasingly common to process payments automatically.
  4. Tighten your belt, but make sure the cost-cutting measures don't show. Make Internet calls instead of using traditional phone carriers, and e-mail documents (in a secure file format) instead of printing and mailing them. Save energy by turning off computers and printers. In northern climes, program the thermostat to fire up the heat just before the workday begins and shut it off an hour before it ends, suggests Jennifer Kluge, president of the National Association for Business Resources, a membership association in chilly Warren, Mich.


  1. Cut payroll, but be creative. You can't avoid scrutinizing your biggest expense, nor should you. But "keep the people you need and make sure they're happy," says Julie Lenzer Kirk, a former tech entrepreneur turned lecturer and consultant. Forgo raises and cash bonuses and instead offer days off, early Fridays, flextime or telecommuting benefits, or even an unpaid sabbatical or tuition reimbursement. You might create a four-day workweek, institute a no-overtime policy, or shift from a richer PPO health-care plan down to an HMO to survive the crunch.
  2. Barter. Elizabeth Donley, CEO of Stemina Biomarker Discovery in Madison, Wis., barters with her software consultant: He does statistical and Web site work for her company, and in exchange, she lets him run his business out of her excess office space. That's netting her company $50,000 in savings over the length of the 15-month contract. If you can't work it out on your own, examine organized barter exchanges and networks (there are hundreds). Just be sure to put all agreements in writing and record them for tax purposes.
  3. Renegotiate vendor relationships. First, harvest the low-hanging fruit: Read the fine print for unnecessary add-ons or mistakes in leases and contracts. Next, when it's time to extend those leases and contracts, shop around for other suppliers. Then call your current vendors and raise the matter of a better deal openly and honestly. Can you pay early for a discount, pay with a credit card for a discount, or do without some bells and whistles? Other entrepreneurs prefer to make a take-it-or-leave-it offer. Says Tepper: "Some vendors might say, 'I'd rather have some money than no money.' "


  1. Slash expenses as if your life depends on it. Reduce salaries temporarily, making sure the boss—that's you—takes the largest pay cut. Tell your suppliers you're running into a problem and need to extend payment over a six- to nine-month period. Then have a promissory note executed, with interest.
  2. Consider last-resort borrowing. Taking a distribution from your IRA is effectively a tax-free loan, but only for 60 days. After that there's a 10% penalty, plus tax implications—and you're putting your retirement at risk. You might also turn to a factor, who will pay you, after taking a cut, the value of one or more outstanding invoices. Although the practice is common in the food, fashion, and trucking industries, it's a short-term fix at a cost well above prevailing interest rates — no panacea for a company already in trouble. The field is lightly regulated, so vet all factors through the Better Business Bureau, and get bids from several different ones.
  3. Liquidate inventory. "Call it a 'The Economy Stinks Sale,' " says Lenzer Kirk. Most business owners know what it would take to make an offer "that customers would find impossible to refuse," Rice says. If doing so can garner enough of a reaction, it just might hold you over for the short term.
  4. Let customers know this isn't a normal business practice, which will make it easier for you to raise prices later. But bear in mind that, in commodity businesses, some customers will disappear when prices go back up.

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