It’s a routine occurrence that many organisations (Start-ups or otherwise) end up in an unenviable position of running out of cash! Subsequently, the entire bandwidth and attention of top management is sucked up in firefighting the crises which follow.

Initially when an organisation (which was hitherto profit making) starts making losses, it starts dipping into its past cash reserves. Over a period as cash reserves get exhausted, the working capital also starts getting depleted in a non-linear manner.

Businesses must have cash on hand for various reasons, such as Opex, investing in new infrastructure and dealing with unexpected expenses. Moreover, a business’s cash flow is often cited as a key factor in its potential for long-term success. A company may have all the revenue in the world, but without the ability to generate cash, it can easily fail. What are the options really before an organisation in such a scenario? Well, it’s all about prioritising your cash flows.

There are certain measures also, which you can take to skillfully weather your cash crisis. Some of them are:

Determine the cause of the problem – If it’s just a timing issue (eg receivables getting realised late than payables getting paid), you might be able to ride out the storm with some help from your vendors. If it’s a more serious issue, you’ll need to take more drastic measures.

Review your past due accounts– Make collecting on past due accounts a number one priority. Always ask for a date that payment will be issued. If they can’t give you a date, ask them when their next decision point is and let them know you’ll be calling that day.

Offer Solutions to Your Past Due Customers

  • Offer online/card payment options to customers
  • Explore factoring/Bill Discounting in case of reputed customers
  • Set up a payment plan (better a portion today than nothing for weeks)
  • Offer a cash discount for immediate payment in full

Offer Early Pay Discounts – Early pay discounts are expensive and not something which is recommended on a regular basis; however, in times of cash crisis, this is a good way to accelerate inflows. Offering these incentives for new invoices may get the cash in the door faster.

  • Collect Advances– Try to get advances up front for new projects. This will give you funding to pay your staff and expenses associated with that project.
  • Prioritizing Payments – Take a look at your tactical cash flow report. Make sure you’ve got payroll covered. If not, immediately figure out how you’re going to make payroll. Once you’re 100% satisfied you’ve made payroll, prioritize your vendor payments. Try to get an idea of when you’ll be able to pay vendors.

Manage your vendors – Call your vendors (or at least take their calls!). No one wants to take those collection calls. Also, every vendor wants to know that they’re important and that you do want to pay them. You’re a lot less likely to be thrown into collections if you talk to your vendors, explain that you are having cash flow problems, and see what they can do to work with you. Make sure to prioritize your vendors and don’t make promises you can’t keep. Lying (even unintentionally) will never work in your favor. Most vendors will understand as long as you’re communicating and making an attempt to get them paid.

Evaluate your team – Don’t be too hasty with layoffs. Overburdening your remaining staff could lead to further problems. You want to have the right number of employees for the workload you have. This is a good time to get rid of non-performers and other positions that aren’t really necessary. Also consider bringing your staff into the discussion. Some of them might want to reduce their work schedule/salary for a couple of months.

Impose a Spending Freeze and make sure your employees know about it. If it’s a small cash problem, maybe you just want to cut certain expenses. Be careful with cutting business critical expenditures as this can often perpetuate the problem.

To Sum up, measures will vary from business to business but some of the above suggested measures work in most businesses. Releasing and ensuring that Cash is the most important reserve in your business is a sure shot way for providing longevity to your business.