My Business Is Running Out of Cash…Now What?

Out of Cash?

Lets start by evaluating your current cash position…

#1 How much cash do you have left?

#2 Is the answer to question #1 enough to cover payroll expenses? If the answer is no…

#3 When is the next payroll obligation?

If the unfortunate answer to #2 was “no”, you need to immediately get a plan of action in place before the answer to #3. Here are some quick ideas to get quick cash into your business.

  • Collect from customers. Target past due accounts and call some of your loyal customers and ask for early payment on some invoices. You can also offer some sort of discount similar to a 2% Net 10 agreement to bring in some cash quicker.
  • Owner cash infusion or loan to the business
  • Loans. You can ask friends and family to help out. You can also target subprime lenders such as (ABL) Asset Based Lenders or (MCA) Merchant Cash Advance Lenders.

These options all have a negative consequence that you will need to accept – Poor customer experience, personal financial strains, taking on a high interest loan, and more.

Now that you have dealt with the immediate crisis you need to take a step back, relax again and focus on the root cause of your problem. Did you see this problem coming? Were you caught completely off guard? It is time for some very strategic analysis.

How Can I Run Out Of Cash As A Profitable Business?

It is critical that you understand that profit is not the same as cash. Here are some common business situations that can cause cash constraints on your otherwise profitable business.

  • Customers not paying invoices
  • Experiencing rapid growth
  • Old aging inventory
  • Purchase of fixed assets: Company vehicle, machinery, real estate, or a large capitalized software purchase
  • Purchasing large amounts of inventory
  • Sudden payments of commissions, tax, or bonuses. (this is a very common bookkeeping and financial forecasting error)

There can be other reasons but those are the most common, and it’s usually a combination of a few factors. For example, a rapidly growing business is often purchasing lots of inventory, investing in fixed assets, and not managing their accounts receivable properly.

If you have mismanaged one of the categories above you need to get a 13-week cash flow forecast in place. This will allow you to look at each transaction both in and out with a more detailed approach. Creating and maintaining a cash forecast is time consuming but important to avoid errors when your cash is tight or already gone.

In more dire situations you may need to consider and look into recapitalizing the business through debt refinancing or by selling equity. I would encourage you to speak to one of our turnaround professionals and allow them to assess if this is right for you and to propose a deal that is fair to you. At MCDA CCG we want to arm you with all of the necessary tools to make an informed decision. We know this is your business, your life, and likely one of the most important decisions you will ever make.

Can I Turnaround an Unprofitable Business?

Unprofitable business turnarounds are a bit more challenging than saving a profitable business that has mismanaged its cash. You need to quickly and strategically analyze the business. Find the answers to the following questions:

  1. When did my business become unprofitable and what was the cause of the change?
  2. What are my top 5 costs?
  3. What are my top 5 expenses as a percentage of sales?
  4. What is my gross margin and gross profit by product/service?

Assuming that you find that your business has good gross margins (Verify how this was calculated – We find that most are not allocating costs correctly) then typically you can pull yourself out of a cash crisis. On paper this might look simple but it will take discipline and effort. You will likely need to pair your solution with some of the following tools:

Headcount and Expense Reduction

I do not think in my years helping businesses I have ever found somebody that enjoys headcount reductions but they are a necessary evil when running a successful business. Start with the following areas and go deeper if necessary:

  • Underperforming sales staff
  • Research and development
  • Administration
  • Underutilized equipment, real estate, vehicles, etc.

Eliminate slim-margin or low volume products and services. This is done to eliminate administrative complexity, focus sales strategy, and reduce inventory.

Focus on operating efficiencies. Challenge your teams to do more with less. The ROI on cost savings is more compelling in a downturn, whereas the ROI on sales is more compelling during a growth cycle.

Insource or outsource processes. At a smaller size, you may not be able to afford a fulltime admin, office space, accountant or sales rep. Conversely, you may be able to save money by bringing in marketing, bookkeeping, or warehousing.

The right move for your business will be specific to your situation. Sometimes it’s important to make your management team part of these strategic decisions. Other times it’s necessary to remove their influence from your thinking. One of our turnaround professionals can help you manage either situation.

What if my Startup Runs Out of Cash?

Startups have their own unique cash challenges due to the typical raise-burn-raise-burn money cycle. In some cases a downturn hits right in the middle of a capital raise, creating an instant cash crisis. Other times a downturn hits months before the runway ends. To manage the unique challenges of a startup running out of cash, you can follow these steps:

1. Know what levers you can quickly pull to add runway. Startups in rapid growth mode are not cash-efficient, but simple business changes can give you weeks or even months of runway. Examples include:

  • Max out credit cards
  • Delay vendor payments
  • Pause inventory orders
  • Freeze founder salaries
  • Furlough non-essential employees

2. Don’t think twice, take the deal. During the good times, founders may shop around for the best terms on a financing round. If the capital markets tighten up, you cannot look a gift horse in the mouth: take the deal you have. Delaying even a day can cause the money to come off the table leaving you feeling pretty stupid.

3. Reduce your growth ambitions. Startups burn through cash due to their rapid growth cycles. Your startup may be cash flow positive if you slow down your approach to growth. Run a few pro forma models to see if that is feasible for your business.

4. Consult your investors. Some investors may want to save your business with additional capital or bridge loans. If the company goes bankrupt they lose their investment, so a capital infusion is often a win-win. But be prepared to give up some control in exchange for the funding. Refer to item 2!

What do I do if my Small Business Runs out of Cash During a Turnaround?

If your small business runs completely out of cash, go back to the beginning of this article and start over: breath, calm down, then assess your resources. A turnaround is hard work that cycles between short-term panics and long-term pivots. Ask yourself how hard you want to work to save the business. If you are feeling stressed and do not know what to do….reach out to us at MCDA CCG we have countless tools to help put you back to a cash positive, profitable business.

Call us today for a free consultation or you can schedule directly using my calendar below.

Leave a Reply

%d bloggers like this: