Cash Flow Crisis! “Who do I pay today?”

How did I get here?

Below is the experience of a small business owner, Brian, and how his business growth journey became a cash flow crisis, a common problem in a growing business without the technical finance expertise in house:

“Business was going well; we reached out first revenue milestone and we were profitable. We were ready to take the next step in expanding the business. We ramped up our marketing spend, hired extra admin support, took on new sales reps and moved premises. We were ready!

Then we had a slow month, and then another. Then we lost one of our key contracts to a competitor. The market seemed more competitive, and customers were putting the squeeze on pricing. Then they started to be slower to make payments. Cashflow became a challenge. And I found myself asking the same question on repeat; “Who do I pay today?””

Brian, wears many hats, trying to balance the need to drive sales, manage operations and manage finances. Below is the approach we took to support Brian to get his finances back on track and remove the financial stress from his day-to-day business operations

How do I stop the leak?

Here are some immediate actions we recommended to Brian to plug the “cash out” leak and win back control of his cash flow management. These put Brian back in the driver’s seat:

Build a simple short term cash flow model to allow you plan each week and month. The first time will be the hardest, but it will allow you see the size of the problem.

Get on the front foot with suppliers. Be in communication with them. Deliver the bad news early and give them a true picture of where you are at. Seek their support.

Revisit your customer payment terms. Offer early payment discounts. Look for deposits for large orders. Don’t be afraid to compromise on margin in the short term to get cash in.

Cut costs if you need to. If business is slower there should be less to do. Turn off the luxuries and discretionary spend. Reduce days for your casual staff. This is not the time to carry anyone. Get the right HR advice, but don’t be afraid to make roles redundant if that is needed.

 How do I never get here again?

Once Brian was on top of the immediate challenge, we then worked with him to come up with longer term strategies to future proof his business from similar challenges in the future.:

Ensure you have a robust budgeting process where you model multiple scenarios, not just your aspirational goals. Prepare a Cash Flow and Balance Sheet forecast as part of your budget.

Get a working capital facility in place early. Much easier to negotiate with a financier when your business is doing well and you have a low cost base, than when you are in crisis.

Get on the front foot with supplier negotiations. Look for longer payment terms as you see your volumes increasing. Build a partnership, where you are part of their growth journey.

Like any asset your business needs ongoing (financial) maintenance to ensure you and your team are making the right commercial decisions.  Planning will ensure you see challenges early.