From the October 2008 issue of Entrepreneur

Just one year ago, all was well: Business was humming along nicely, the checks were rolling in, and you had to boost staff numbers to handle growth. But lately, things are too quiet: You've lost several customers because of their financial troubles, and other customers are paying late. Your accounts have dipped precipitously, and you've realized quite suddenly that if this continues, you might not have enough money to make next month's payroll.

With home equity loans and other fast credit harder to come by these days, a little bit of trouble can be that much harder to handle. But by recognizing the warning signs and acting on them, you can sidestep the abyss.

For starters, assess your cash-flow situation and set up a daily flash report to tell you the amount of cash on hand, the status of accounts receivable and how much is coming in and going out. If the bottom line is consistently negative, the status quo is not sustainable. Your payables are another good gauge, says Jerry Silberman, CEO of Corporate Turnaround. "Payables say everything: If they're getting older and older, it's crystal clear [that you're in trouble]," he says.

If you find that you need to borrow a lot of money or run up your credit card to make payroll, that's another red flag that something needs to be done now. "Spending a dollar you borrowed to make back six or seven is good," says David Gass, president of Business Credit Services. "But if you borrow a dollar to pay wages, that can be extremely harmful."

If you suspect you're having moderate to severe cash-flow problems, take these four steps to help stem the tide.

  1. Cut costs strategically. Don't just slash 10 percent across the board, says Paul Rich, a principal with accounting and consulting firm Rothstein Kass' Business Consulting Group. "Look at every single expense and say, 'If I reduce this, will I remain in business or go out of business?'"

    "Be careful not to cut services that will reduce your profits," adds CPA David Kaufman, a principal at Rothstein Kass. If your customers value your outstanding service, reducing your call center headcount won't help cement their loyalty.
  2. Lose customers to boost profits. Growing your customer base by 30 percent sounded good a year ago, but a gross profit analysis could reveal that it was a mistake, given the expenses you had to add to service those customers. "You might want to say, 'I'm going to cut off these 10 customers who are the least profitable, pay me the slowest and give me the most grief,'" says Kaufman. "By doing that, you can pare down your staff, reduce your overhead and make more profit with less revenues."
  3. Forfeit pay. Take out enough to feed your family and pay taxes, and leave the rest in the company's coffers. If the situation gets desperate, Gass recommends you ask your staff to forfeit one week of payroll, which can save the company hundreds of thousands of dollars. Some employees may be spooked by the ominous tone, but if you have a serious, coherent plan for how you're going to get out of the mess, they will often stick around.
  4. Review your plan. Whenever the market or economy changes, review your business model to make sure you can profit in the new climate. If you're losing customers, question why you're not relevant to them. "What's missing?" asks Rich. "Is it your quality or your timing? Is it the product itself? Are you competitive with the pricing structure and services you provide?" If necessary, tweak your offerings or add customized services to appeal to more clients. Says Rich, "You have to figure out what it is that's unique about you."

C.J. Prince is a writer specializing in business and finance. Reach her at cj@cjprincemedia.com.