The Cash CrunchPosted by Celeste
Imagine that you are a manufacturer with plenty of orders. Your customers are pressuring you to supply them with more product every day. This sounds like a nice problem to have, doesn’t it?
Your suppliers require prompt payment – some of them may demand advance payment or cash on delivery. Your customers may pay you upon delivery or even later than that. Perhaps you have worked out a deal with one or two vendors that you will sell your product on consignment in their establishments just to get shelf space.
This is the cash crunch. Good business planning with a complete set of financial projections, including the ever important Statement of Cash Flows, can help you predict when such an event might occur and help you plan for it. If you are prepared, you can navigate this situation.
Any of the following strategies can help avoid being caught with negative cash flow:
- Bank financing, whether a loan or a line of credit can help you through those times when your company is growing. Be sure to have a business plan with a full set of financial projections to submit with your credit application, as well as your personal net worth and credit history.
- Investors can be a great source of capital, and they can also lend their expertise to your operation. In an equity financing relationship, it is important that all the players add value to the deal. Tailor your business plan to the investor audience, and also take time to interview the investor carefully before entering into an equity agreement.
- Balance your accounts payable and accounts receivable. If you are paying for everything immediately, but allowing your customers the luxury of time when it comes to your accounts receivable, you are financing them for free. Stop it.
How have you handled the cash crunch in the past? How will you prepare for it in the future?