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Damage Control

Prepare yourself for an emergency cash crunch.

Entrepreneur magazine, March 1998

A cash flow crisis can be triggered by a variety of factors, including seasonal business fluctuations, customers that either pay late or don't pay at all, and major equipment breakdowns. "A cash crunch can cripple a small company," says Rob Hackley, executive vice president of Hotsy, a distributorship in Central Florida that sells industrial pressure cleaning equipment and detergents. "You can't prevent them, but if you're prepared for them, you can survive." He shares these tips:

  • Establish a rainy day fund. Set aside funds in an interest-bearing account that you can draw on in an emergency.
  • Review your cash management techniques. "Schedule your [payments] for the maximum advantage," Hackley advises. "Don't pay anything before you have to, but also watch for early-payment discounts--they can often mean substantial savings." Also, periodically ask your banker about various cash management products or services that may be available. One such service is a sweep account, which allows you to earn the maximum interest by automatically transfering funds to the appropriate accounts on a daily basis.
  • Control your overhead. Keep your fixed costs low and your variable expenses tied to revenue so if your income drops, so will your expenditures.
  • Negotiate with vendors. Consider requesting extended payment terms at the time of purchase, particularly if your business experiences seasonal fluctuations.
  • Establish and maintain good credit. If you have a track record for paying on time, creditors will be more willing to work with you during a crunch.

Jacquelyn Lynn is a business writer in Winter Park, Florida.
 

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