Checklist for Finding More Cash Flow in Your Business During Challenging Times

Statistics show that small business owners face many challenges; in fact, almost half of new business ventures don’t make it to five years.¹ While many entrepreneurs love building their business, they often fall into the trap of neglecting to manage the business, yet it’s critical for business owners to get a firm grasp on their cash flow.

According to the U.S. Bureau of Labor Statistics, approximately 20% of small businesses fail in the first two years and of the others, 45% fail before the fifth year. If that isn’t dire enough, only 35% of new businesses make it to their 10-year anniversary. Kind of a sobering thought, isn’t it? You invest years of your life, money, and hard work, to be left with nothing, in many cases. On top of that, you may have remaining debt from your failed business.

Many small business owners start out wanting to control their own destiny, leaving a job in which someone is telling them what to do, dreaming of being a titan of industry, and becoming wealthy beyond their wildest dreams. Maybe there’s also a desire to help humanity and leave a legacy to their children. Sound familiar?

The importance of running and managing the business

A typical entrepreneur loves building the business more than managing it. During difficult financial times, including reductions in cash flow or a nationwide recession, neglected aspects of the business can start to show. A lack of prudent management could lead to too much red ink and a serious negative cash flow every month. Even worse, there’s a chance of becoming one of the small business failure statistics and possibly having to declaring bankruptcy.

If you find yourself in such a situation, or want to help avoid these types of scenarios, don’t fool yourself into thinking everything will be okay by just riding things out. First, find mentors and friends who can give their time and provide honest, maybe even brutal, feedback. Second, face the fact that your business financial problems may stem from a lack of cash flow management.

Adopting the chief financial officer (CFO) mindset

As the owner, you have a choice. You can declare bankruptcy, declare failure, or adopt the “CFO mindset.”

Often, business owners are so busy working in the business that they forget to work on their business. It might be far more exciting to make a sale and build a business than it is to review the budget. It can be easy for many entrepreneurs and small business owners to fall into two traps: 1. Always searching for the next big opportunity, or 2. Be ready to jump on innovative ideas as they arise. Their talent for creativity and finding opportunities can come with a major blind spot when it comes to running a business.

Effectively managing and maximizing cash flow is critical to the success of any business. Often, these duties fall to the CFO, whose purpose is to guide the owner/CEO to make informed financial decisions for the business. CFOs set financial targets for the business and help effectively manage and utilize the company cash flow, achieve profitability, and unlock the company’s value.

Understanding your business cash flow is critical to success

Even if you have a finance and operations manager handling some of these business duties, or a CFO who isn’t living up to expectations, you may need to take on the role of CFO yourself if you want your company to survive. The first task is to find out just how badly the business is doing. Put together cash flow statements and a budget. If you’re like a lot of small businesses, you may be operating from the “checkbook accounting” method — meaning, if there’s enough cash in your checking account, you think you’re doing okay. However, as you may already know, this can be a dangerous mindset.

Become an expert in always knowing your cash balance and cash flow. Consider hiring a bookkeeper if you don’t already have one, put together monthly cash flow reports that project out six months and update them every month. These reports will eventually show a full-year projection. Good financial reporting will help you know where the company stands and help identify possible pitfalls before they occur.

Building up cash reserves

Once you understood what the company cash flow looks like, focus on “stopping the bleeding” if necessary to build up cash reserves. Unfortunately, this might include drastic action, like taking less payroll and laying off staff. It’s possible that a lack of proper management may sadly lead to negatively impacting the lives of people who depend on you, which is a painful lesson to learn.

You may also have to cut some essential services, like benefits and bonuses. Employees might have to take pay decreases; you may need to reduce yours or stop taking a salary completely (hopefully only temporarily). There may need to be calls or letters to every client who owes you money. Review your account receivables each month. Consider offering incentive rewards to staff members who bring up expense-savings opportunities. Learn to run your business as lean as possible.

Another step to consider is calling all vendors to whom you owe money and request the following terms: Stop collection on all outstanding payments from the past six months but continue to provide the services needed. Pay for current services and promise to pay back every cent owed for past services rendered. But right now, you need some breathing room.

Let them know that if they don’t agree to these terms, you are unlikely able to pay them right now (and may need to find others to work with). Have similar conversations with landlords and equipment leasing companies, anyone with whom you have agreements, to renegotiate contract terms. Accept that vendors and service providers may sue you for breach of contract, though building up cash reserves is paramount to business survival and these actions can help give you more time to recover in the immediate months ahead.

If you haven’t done so already, develop deep relationships with banking partners who have provided financing for the business. By building a reputation of being reliable and successful, they’re more likely to be supportive when you explain to them when you can’t meet payment terms. This may be a tough task — bringing feelings of failure, disappointing friends and people who trusted you. Request updated terms for repayment, whether that means postponing payments, reducing payments, or refinancing. Consider selling off property and sacrificing prices for cash flow. Some banks may even agree to take real estate holdings, collectibles, or life insurance contracts in exchange for outstanding debt.

Once the business has more stability, you’re likely going to need to pivot, to make sure the business is generating more revenue. That might include adding more or different services to your clients.

Staying the course

If you are successful and the business recovers, think about hiring financial help to maintain and grow. Never take your eyes off cash flow again as it’s the life blood of every business. You can prevent your company from having to deal with surprise layoffs or using cash reserves. You won’t ever want to depend on a bank or others for financing again!

When the economy turns, markets change, or you find yourself facing tough times with your business, do not fool yourself into thinking it will end soon. Take immediate action. If you are a business owner in a comparable situation with cash flow, act now.

Taking steps if your company is in trouble

Here is a checklist to help you think like a CFO and implement steps for saving your business:

• Understand your business cash flow. If you haven’t done so already, create a cash flow and other financial reports (budgets, projected cash flow, etc.) to see where you stand. Aim to update and review these reports at least each month.
• Manage your cash flow. Where is your revenue coming from over the next three to six months? Constantly review every expense item in your income statement to find potential savings. Be aggressive about collecting payments and overdue accounts receivables. Ask for more payment upfront.
• Contact your legal, insurance, benefits, and accounting professionals. Tell them you need advice, ideas, and help. If they cannot help you or do not help you, consider replacing them. Your candor and honesty can go a long way in getting them to listen and act.
• Review all vendor relationships, contracts, and lease arrangements. Keep only the essential services you need and re-negotiate contracts and leases. Ask for discounts. Again, having honest conversations can help you get what you need for your business to survive.
• Secure lines of credit with your current bank or a new bank. Draw down the total amount and keep this cash at a different bank. Banks can withdraw money from your accounts without your permission if they see that your business is in financial distress. Refinance existing loans.
• Review your staffing needs. If layoffs are inevitable, try to gauge if your employees would be open to part-time hours or lower pay instead. Some may be open to becoming independent contractors (this would help save payroll taxes and benefits). Hold off on hiring until your cash reserves are at an appropriate level.
• Double down on growth and client service. Even while managing your cash flow and expenses, you need to keep growing your business. Look for other revenue-generating products or services. Ask your employees for help. Consider incentives to reward employees who suggest important business ideas.

Even if your company is doing well, it’s smart to take stock of these ideas to help maximize your cash flow and grow your business. Don’t wait to work on your business when things get tough. Run your business as if you depend on every dollar of cash flow. If unfavorable economic times have taught us anything, it’s that none of us can predict the future. But you can always be prepared for the unexpected by adopting the CFO mindset.

If you want more information about tracking your business cash flow or taking steps to save your business, contact your Mercer Advisors wealth advisor. If you aren’t a client, let’s talk.

“Top 6 Reasons New Businesses Fail,” Investopedia, June 1, 2024.