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What to Do if You’re Running Out of Cash


Getting Out From Under Negative Cash Flow and Business Debt
By Nora Caley

The key is not only to make sure the in-flow numbers are higher than the out-flow, but also to make sure the timing is right.

Running out of cash is one of the main reasons for business failure. Even if you have a great product, reliable service, and a long list of happy customers, your business can end if you don’t have enough cash to pay bills and continue working. There are ways to prevent that kind of ending, even if seems like it’s getting late in the life of your business.

First, a quick refresher on what cash is. Think of cash as simply the amount of money you have in your business checking account. Not the amount you expect will come in soon, but the amount you can write checks against today.
Cash is not the same as profit, says Doug Gilbert, a professor of graduate business for the University of Phoenix. “Startup businesses often confuse profit with cash flow, and they think as long as the business is profitable it will succeed,” he says. “But you have to make sure you always have enough cash.”

Cash flow consists of in-flow and out-flow. In-flow is the money you have coming in, or the money your customers owe you for products or services you sold them. Out-flow is the amount of money you need to spend on your business, such as the payments you’re making on your equipment, monthly charges for your internet service, etc.

The key is not only to make sure the in-flow numbers are higher than the out-flow, but also to make sure the timing is right. You don’t want to have your bills due on the 10th of the month and let your customers pay you on the 15th.

Gilbert says business owners can get into trouble if they are too optimistic about how much money will come in, and when it will come in. “The most common failures I’ve seen are slowness of payment by customers, and unanticipated startup costs,” he says.

Preventive Measures
Gilbert suggests using software to track cash flow. Some software titles include Microsoft Small Business Accounting (www.microsoft.com) and QuickBooks from Intuit (www.quickbooks.com). Be conservative when you project cash flow. “When anyone brings a business plan to me, I tell them to take the amount of time they feel they need to collect money and double it. So if you think it will take you a month to collect $100, it will take two months. Then double the amount you need for everything. If you think you need $50 to buy something, double it to $100.”

Mac Clouse, a professor with the Reiman School of Finance of the University of Denver, says business owners should prevent cash flow problems from the earliest days of the startup. “Most of the failures are because the firm was undercapitalized,” he says. “They didn’t have enough cash upfront to start the enterprise.”

Make sure you have enough capital from your loans, friends, credit cards, investors, and your own savings to work for the few months in which you likely won’t have cash in-flows. “You’ve got all these out-flows that are going to happen in the first year of operations, and you may make some sales on a credit basis, but you don’t collect dollars until later in the year,” Clouse says.

One solution, says Irwin Rudick, vice president of counseling for the Service Corps of Retired Executives (SCORE) in San Diego, is to accept credit cards. If you set up a merchant account with your bank, you can get money deposited into your account more quickly than if you wait for a client to open your invoice in the mail and decide when (or whether) to pay you.
He says the biggest indicator that your business will fail is simply that there is no money in your business bank account. “That’s really the situation. They can’t pay their bills.”

What to Do
Set up your business checking account so you can view your statements online. Check often to see your balance. If it looks like you are running low, take steps quickly.
First, contact the customers who owe you money. Try to collect from them as soon as possible. If you’ve completed the work as agreed, they have no reason to delay payment, unless you put overly lenient payment terms on your invoice. For example, if you write “Net 30,” start asking for “Net 10.” Instead of waiting until the end of the month to collect, send an invoice as soon as your work is complete.

If your business sells a product (not a service), Rudick recommends getting rid of inventory quickly. Even if you sell at a loss, at least you will have some cash to pay current bills. “You hear the expression that cash is king,” Rudick says. “Well, it really is. Cash is the lifeblood of your organization.”

If it’s a service you provide, offer a discount to new customers. Try cutting costs for a limited time only. “The nice thing about being a small business is you can be incredibly creative,” Clouse says. “No one says, ‘That’s not the way we do it.’ You can say, ‘I can do it any way I want; it’s just me.’”
Offer longtime (and fast paying) customers a discount on their next order if they pay cash upfront. Finding new business can help only if they pay you quickly.

Borrow Money
You can also try getting a loan. A loan can be a temporary solution, and can work if you do have money coming in. If you don’t have any foreseeable money coming in — that is, you don’t have any clients who owe you money — then a loan might add to your troubles because you won’t have money to pay it back later.

If you approach your bank or your warm (friends and family) market, you will likely have to show them your financials. Be prepared to tell your lenders why you are having cash flow problems, and why you think a loan would help. In your presentation, show that you have generated revenues, but the cash has not come in yet, and you expect it to come in on a specific date. Or if you haven’t generated revenues, and you hope your latest idea will, make a case for that argument. “The biggest thing you have to do is be able to prove that you know what’s going on and you know why this is happening and make corrective steps to fix this,” Clouse says.

Your bank won’t loan you money if you cannot convince them that you will be able to repay the loan. The lender will want to see a record of sales and profit. If your bank rejects your application, try a microlender (http://www.sba.gov/financing/sbapartner/microloan.html).

You can also use credit cards to get a cash advance. As with any loan, make sure you have a plan for repaying the money. Credit cards can give you a short term loan at a high interest rate, and they don’t ask you questions about your business plan. “The problem with that is you haven’t gone back and really addressed why you are in that problem,” Clouse says. “If you’ve got operating problems, a loan doesn’t fix that. It just delays the inevitable.”
If you funded your startup with a home equity loan, contact your bank to see if you can refinance the loan at a lower interest rate. Or apply for a home equity line of credit, from which you can draw money only when you need it.

You might even be able to attract an equity partner. If you can convince an investor that your business is making money, and that your struggle is temporary, someone might be willing to invest money into your company. As with a loan, be ready to show your financials and your plan for generating revenues.

Changing your operations
Look at your business and see where you can cut costs. Maybe you don’t need to buy the laptop you wanted; the desktop computer is enough for now. Cancel the subscriptions to trade magazines and read them online. Borrow business advice books from the library. Don’t travel unless you have to. If you have office supplies you haven’t opened yet, take them back for a refund. Maybe you have an old printer or DSL modem you can sell on eBay or Craigslist.

Also cut back on personal expenses, such as new clothes and restaurant meals. Although your business bank account and credit cards are separate from your personal accounts, cutting back on your home expenses can help you if you must pour more of your savings into the business.
Don’t stop marketing. You need new business, so continue to run your ads in the media that generated good response. Maybe you can run a black and white ad instead of a color ad in your local directory. Use free advertising, such as word of mouth: ask your satisfied clients if they know of anyone else who can use your services. Find free events or other opportunities where you can casually hand out your brochures and business cards.
You might also consider a few days of temp work or going back to your former day job to earn some cash.

Paying the Bills
Prioritize your bills. There are various factors that can help you decide which bills to pay first. Gilbert suggests first paying the vendors that can put you out of business. If you market a food item, pay the ingredient vendors first. If you are a consultant, make the payment on your computer first. “I always tell people to elongate terms with vendors but not to the point that they won’t deliver any more,” he says.

You might be able to negotiate new payment terms with your creditors. Ask for another month to pay your current bill. Sometimes banks will accept interest-only payments for a month or two. “The main thing is not to run away, not to hide,” Rudick says. “You’ve got to be upfront. People respect that.”

Some creditors will not negotiate, so you have to figure out how late you can make a payment without losing the collateral (car payment, for example) or before you have to pay a late fee (credit card payments). Some experts advocate paying the mortgage first, because staying in your home is the most important priority. Others say the mortgage company will wait a few days before adding a late fee to your payment, so take advantage of that cushion.

Don’t try to get out of your cash troubles alone. There is plenty of free advice available for small businesses. Find a counselor at www.score.org or at your local Small Business Development Center (www.sba.gov/sbdc/). Maybe your banker can offer advice. You can also pay for advice from your lawyer or accountant. An advisor might be able to tell you not only how you can come up with cash to keep your business running, but they might also tell you whether it’s time to completely revamp your business. “It doesn’t make sense to continue doing something if it’s not working,” Clouse says. “See if there’s something you can change.” HBM

Sources: Maclyn (Mac) Clouse, Professor, University of Denver; For University of Phoenix: Chanthy Na, Galloway Group PR; Doug Gilbert, Professor, College campus chair for graduate business. Mike Keaton at media@score.org; Irwin Rudick, San Diego, Vice president of counseling in SCORE.
Dos and Don’ts to Avoid Running Out of Cash

BULLETS SYMBOLS (Can’t Get MS Word to put Bullets in)

– Keep an eye on you business checking account, so you don’t get any surprises.

– Be proactive about collecting payments from your customers quickly.

– Be conservative, not optimistic, about how long it will take for the money customers owe you to come in.

– Accept credit cards so you’ll get your clients’ payments immediately.

– Try to time your cash in-flow and out-flow so your bank account remains positive.


– Confuse profits or future revenues with cash.

– Avoid calls from, or lie to, you creditors or investors.

– Apply for a loan if you have no money coming in to pay it, and no projected revenues.

– Take cash advances if you have no foreseeable income coming in.

– Continue spending on nonessentials when you are running out of cash.
“If money is your hope for independence you will never have it. The only real security that a man will have in this world is a reserve of knowledge, experience, and ability.” – Henry Ford

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