As business owners, we want to grow successful businesses. For most of us, that journey many times includes some very uncomfortable and stressful periods.
One of those times will be a cash crunch. Many businesses fail because of unexpected cash flow issues and an inability to correct the situation, pay bills, or fund payroll.
When leadership has no strategy or plan in place for predicting and managing a cash flow shortage, a cash flow crisis occurs. Should you find yourself in a cash flow crisis, you will need to take action to save your business and bring it back to health. A good offense is fueled by a great defense. With that said, the following may help you avoid a bad situation and help you get through a cash crunch.
CREATE A PLAN OR BUDGET
Preparing a budget gives you a road map that shows revenues, expenses and capital expenditures that either provides for positive cash flow or quantifies projected negative cash flow with enough lead time to take action to fund such shortfalls. Performing this exercise annually while tweaking it monthly is paramount to getting in front of any potential problems. A good budget will start with a revenue forecast of periodic route work, annual renewals and new sales. Once revenues are projected, the rest of the plan consists of listing the corresponding expenses with the expected level of business.
MANAGE ACCOUNTS RECEIVABLE
While budgeting for revenue is the fun part, if you execute on the revenue plan, you should be able to project annual revenue increases. But hold on: Forecasting revenue vs. collecting cash is a totally different ballgame. You can make a profit, but if you don’t collect your money, you will quickly get into trouble.
That is why managing accounts receivable (A/R) is Job No. 1. There are many strategies and techniques that work in this regard, but whichever you use, remember you must collect your money.
Two common A/R management techniques used in the pest control industry include:
- Accelerating payments by charging credit cards prior to service. This can be done by creating monthly customer payments on the first of the month for quarterly or triannual service, or simply charging the credit card for that quarterly or triannual service on the first of the month that service is performed, or at the time of service. If none of these techniques are acceptable, the customer must be billed immediately after service, which means you will be sending out invoices on a daily basis.
- Measuring your collection efforts. One of the most important ratios as it pertains to collections is called days of sales in A/R. It is a simple formula where total sales for the year is divided by 365 days to give you daily sales. The A/R balance is then divided by daily sales. The result is the number of days of sales that are in the A/R balance. If your customer payment terms are 30 days, then a quotient greater than 30 days means your customers are not adhering to terms. Less than 30 days, and you are collecting faster than the terms you allow.
TAKE DRASTIC MEASURES
If you find yourself in a position where you are in an extreme short-term cash crunch, take these four emergency measures:
- See which expenses can be slashed, and implement immediately.
- Speak with your vendors to extend terms in exchange for an immediate partial payment.
- Look at any unused equipment or vehicles that may be sold to raise cash. This may include factoring receivables (a very expensive option).
- If these measures aren’t enough, you may have to tap personal resources, such as a home equity line or borrowing from retirement accounts.
While these actions are extreme, they may be necessary. However, a well-thought-out budget should keep you from getting into this situation. If your budget tells you that you will be cash-negative, it gives you plenty of time to line up financing to cover the shortfall, thereby averting an emergency.