10 Tips for Surviving a Cash Flow Crunch

Cash flow challenges are practically inevitable if you own a small business. If you're a freelancer like me, they become almost a way of life. Rusty Luhring, owner of Survivalware.com, has been advising small businesses for more than 30 years. He shares his tips on surviving a cash flow crunch: (While all of these might not apply to every business, there are things most of us can start doing better in the list. For me, it's invoicing promptly.)

1. Triage payments
Make a list of all payments due for the next three months. Give payroll priority and see what else you can negotiate to pay later. You may be able to slide with utilities; subcontractors can often be persuaded to wait a bit.

2. Accelerate collections
Call customers to check on payments that are overdue, or due soon. If you have a good relationship, you may be able to ask for early payment as a favor. For older accounts receivable, offer to forgive 15% of their overdue balance if they pay within the week. This may encourage them to respond and it's less costly than hiring a collection agency to go after receivables you may never see.

3. Invoice early
If you consistently send out invoices a week late, you are delaying receipts by a week. If you average $7,000 a week in receipts, the net effect is that you have $7,000 less to work with. If you take 10 days to send out the invoices, it's the same as if you need another $10,000 in working capital to run your business.

4. Offer discounts
This invoicing carrot can speed collections, but make sure that you understand how much it is costing you. Some large companies have policies in place that require speeding payments to earn discounts, e.g., 2% for paying within 10 days. But beware: Suddenly offering a 5% discount for payment in 10 days could give out the wrong signal.

5. Invoice more frequently
If you are billing customers for time, consider billing twice a month instead of once. Billing promptly on the 1st and 15th of the month speeds up immediate cash flow.

6. Ask for some payment upfront
Instead of just billing for time as it is incurred, ask for a third upfront, a third while the job is in-progress, and a third upon completion.

7. Fine-tune the timing of your payables
Take advantage of the maximum allowable time (60 to 90 days) to pay suppliers. Picture it as an interest-free line of credit that gives you more time to collect accounts receivable without spending money on short-term credit lines. If your payroll withholding taxes total less than $50,000 per year, remit the withholding on the 15th of the following month, instead of three days after payday.

8. Ask the right people for a loan or investment
Remember what they say about banks: They will lend you money only if you can prove beyond a shadow of a doubt that you don't need it. Outside investors will sense your plight and demand onerous terms. This is a time to turn to friends and family and/or to get creative. Key customers might be able to help you out by advancing money to undertake a new product or pre-paying for products in anticipation of future demand.

9. Manage your credit cards
Many credit cards offer a cash advance credit limit that is separate (and lower) than the overall credit limit. Take the time to track the balances and credit limits for cash advances vs. overall purchases separately. Create a simple spreadsheet, and update it as the bills come in. When things get tight, make sure you charge whatever expenses you can to those cards that still have available merchandise credit, but no available cash advance credit. During a cash flow crisis, you want to maximize your available cash advances as they are almost the same as cash.

10. Consider layoffs
While large companies can take advantage of "redundancies" and "synergies" in downsizing their staff, it's more difficult for small business owners. Each employee has his/her own specialized revenue-generating abilities. Instead of letting go entirely, discuss rehiring them as freelancers. It reduces the costs of health insurance, payroll and stock options for you, and increases their freedom and provides time for them to seek out additional work from other companies to boost their income.