In ordinary times, cash is merely king. When sales slump and costs rise, cash can claim a far more grandiose title: emperor of the universe, anyone? No matter how lofty its status or how stressful the environment, keeping cash flowing comes down to two things: accelerating the stream of cash coming into your business and slowing its outgo. But these days, says Tom Long, founder of Solid Oak Consulting, entrepreneurs need to take an especially creative approach to maintaining cash flow. Here are some ideas to get your creative juices flowing:
- Make a careful and detailed cash-flow projection before you decide what, if anything, to do to improve your cash situation. And don't rely on your accounting software to do it for you. Few software packages have the ability to do that job well. Your best bet is an electronic spreadsheet, such as Microsoft Excel.
Unusual cash-flow boosters
. Reduce the amount of cash consumed by salaries and wages by compensating employees in part with stock options.
. Cut cash devoted to R&D by letting other companies iron out wrinkles in new products. Then, either buy out competitors or quickly and forcefully be second to market.
. Lower your taxes by buying another company that has "tax loss carry forwards" you can use to offset your own profits.
. Reduce maintenance costs by selling equipment, real estate and other assets and leasing them back with the understanding that the new owner handles upkeep.
. Offer to pay suppliers with your company's finished goods or services rather than cash.
. Trim your debt service burden by refinancing to get lower interest rates or extended repayment terms on principal. -M.H.
What's Your Operating Cash Flow?
To grasp your ability to pay bills over the short term, look at your operating-cash-flow ratio. Start with the dollar amount of cash flow generated by operations during the quarter, year or other period. Divide that by the current liabilities incurred during that period. The result is your operating-cash-flow ratio. For example, cash flow of $100,000 and current liabilities of $80,000 gives a ratio of 1.25. A number less than 1 suggests you should consider borrowing or otherwise improving liquidity.
- Don't delay paying your own bills in order to conserve cash. Long says, "All kinds of challenges and problems can occur from that."
- On the other hand, don't pay bills early--unless the seller offers a substantial discount for quick settlement. In that case, paying in 30 days to get a percentage point or two off the total can be well worth it.
- Lease rather than buy equipment--even sell your building and lease it back. That can free up sizable amounts of cash. "Small businesses often want to own," Long says. "But they're not always looking at whether something's worth having."
- Factor your invoices. If you thought of your company as one that didn't have to factor its invoices, think again. Factoring, in which financial institutions buy receivables for a discount and then take over collections, is something large companies embrace more readily than small ones. But it's just another form of financing: "I've never shied away from it," Long says. A variant called purchase-order financing can provide the advance cash you need to handle an unusually large or complex order.