Proper cash management is critical for the overall financial health and sustainability of a business. Having proper liquidity and appropriately managing working capital facilitates business continuity and creditworthiness, bolstering investor confidence while allowing you to seize opportunities for expansion and diversification as they arise.

Without appropriate liquidity, you run the risk of falling into a “cash flow crisis.” Wait. What? Yes. A crisis. A cash flow crisis. A cash flow crisis occurs when a business experiences a shortage of cash and is unable to meet its short-term financial obligations. In other words, it's a situation where a company faces difficulties in paying its immediate liabilities, such as payroll and other operational expenses.

A cash flow crisis is a serious situation that requires immediate attention and strategic decision-making to avoid severe consequences.

Situation: Cash Flow Crisis

You just looked at your company's 13 Week Rolling Cash Forecast, and you see that things are tight. So tight that we've got weeks where we're in the red. We don't have enough cash to meet all of our obligations, and we might not be able to make payroll. Our emergency fund is exhausted. We can’t diversify our revenue streams today. And there is no governmental assistance (PPP, ERTC, ARPA, PRF…) to quell the storm.

What do we do?

13 Week Rolling Cash Forecast

Well, we’re already ahead because we have a 13 Week Rolling Cash Forecast and can foresee the shortfall. This allows us to plan accordingly. Great job! If you don’t have a 13 Week Rolling Cash Forecast, you need one. It provides a clear line of sight to what lies ahead and is critical for proper planning.

Prioritize Payments

Now it’s time to prioritize payments. What?! They’re ALL important? Of course they are. But certain expenses, like payroll, rent, and key suppliers, are non-negotiable and must be prioritized to maintain critical operations.

Negotiate with Suppliers

Now is a great time to leverage the incredible partnerships you’ve built. Reach out to suppliers to discuss your situation and negotiate preferential pricing, extended payment terms, or discounts for early payments. (Check any formalized lending agreements you have to ensure negotiating a note or payment plan will not create a default on other loans or lines of credit.)

Offer Customer Incentives

Offer discounts to customers for expedited or prepayments. This will improve the velocity of your cash receipts, garnering prompter deposits. But remember, the discounts and incentives will decrease your profit margin.

Reduce Operating Expenses

Identify and implement cost-cutting measures. Renegotiate contracts, reduce discretionary spending, and temporarily freeze non-essential projects. Be very thoughtful, considering the long-term implications of each decision.

Optimize Inventory

Now is not the time to sit on a stockpile of inventory. Assess your balance composition, and liquidate slow-moving or obsolete inventory to generate cash. Cold hard cash. We have a payroll to fund.

Explore Debt Restructuring or Financing Options

If you already have a loan or line of credit, connect with your lender to discuss potentially restructuring or renegotiating terms, as this may provide either temporary or long-term relief. If you do not already have a loan or line of credit, a line of credit or working capital loan can bridge the gap during this arduous time. But carefully review the terms and covenants, properly considering the impact on future cash flows before executing.

Communication with Stakeholders

Now is not the time to go radio silent. No ghosting here. Remain communicative and collaborative. Communicate honestly and frequently with key stakeholders. Share the situation, your plan, and the expected path forward. Keeping key parties apprised of the current situation and your remediation plans should foster understanding and cooperation.

Monitor and Adjust

Continuously monitor your cash flow situation and adjust your strategies as needed. Update your cash forecast (weekly, or daily if needed) and adapt your plans based on changing circumstances.

Keep a Level Head

Staying calm during a cash flow crisis is key, as it positively influences decision-making, communication, and overall business resilience. In all situations, you set the tone for how the organization responds to challenges and contribute to a more measured and strategic approach to crisis management.

We said it before: A cash flow crisis is a serious situation requiring immediate attention. Managing through it may feel overwhelming or insurmountable. But it's not. There is a path forward. Take a deep breath, and a sip of your Tension Tamer tea, and start planning.

And if you need help, reach out. We’ve done this many times.