Nearly every business experiences a cash flow crunch at some point. If your business model is good, it will be only temporary, and there are some steps you can take to ease your way through it.
The most common solution is to borrow. Don’t fall for the scam of a “working capital loan.” When you get past the lies and distortions in the sales pitch and work the numbers, you may find the real cost of these “loans” works out to APRs north of 50 percent. That’s because the daily or weekly repayments on the “loan” make the actual borrowing time only a fraction of the stated term. You don’t have very long to use the money, and prudence dictates you set aside about half of it to ensure you don’t fall behind on payments. There is much more that can be said about such “financing,” but none of it is good.
Don’t borrow until you determine the cause of your cash flow problem. If it’s because your business model isn’t making money, borrowing will only cause you to lose the business sooner and be left with debt that may be nearly impossible to pay off.
Among electrical businesses, the typical cause of poor cash flow is that the firm underbids to get work. You can’t make up for losses by getting more of them; you have to bid smart to make profits. Simply being cheaper than the other guy isn’t the way to succeed. If you’re not getting the work you need to meet your revenue targets, look at your marketing. How does your firm present itself, and why should anyone engage its services?
Let’s say your business model has worked well for a long time, but now there’s a slump for a reason you have determined is only temporary. Here are some reasons that are acceptable:
• Late receivables.
• Excess inventory left over from recent job; customer reduced the scope.
• Reduction in smaller jobs, in preparation for a large contract that you were awarded but have not yet started.
• A seasonable problem; you get a slump this time every year.
Avoid these solutions:
• Laying people off. This is common among large corporations. Yet studies show that almost every corporation that has engaged in large-scale layoffs over the past 50 years has never recovered from doing so. Usually, these permanently cripple a business; stop to think about why that is so. Use the mass layoff solution only as a last resort.
• Borrowing from payroll taxes. This is not an option, don’t even think about it.
• Unilaterally borrowing from vendors. It’s not borrowing, it’s stealing. If you don’t have the funds to pay what you owe, be open about the problem, and ask them if you can work something out so you have more time to pay. They also have bills to pay, but might be OK with taking 75 percent now and 25 percent later rather than getting no money until you can pay the whole bill.
Consider these solutions:
• Change how you bill projects. Short-term projects produce payments quickly. A one-day project can be billed the same day, and the size of the payment is likely to result in quick payment. If you don’t bill this way with longer-term jobs, that could be killing your business. In the project negotiations, agree to completion milestones at which you bill the customer. Basically, you break a big project down into several smaller, but immediately billable, projects.
• Change how you bill for materials. Attempt to bill for materials right away, rather than waiting until the job is completed. If you buy on net-45 and bill your customer on net-30 the cash crunch from materials purchases should completely go away. Not all customers will go along with being billed separately for materials before the work is completed, but take it where you can get it. You may sweeten the pot by telling customers that their project is going on the priority track or that this ensures that there will be no delays because of supply problems; just make sure you make good on those promises.
• Return unused inventory. You may pay restocking fees, but you will free up capital&mdash'maybe enough to solve the whole problem. When using this method, you’re putting a burden on the distributor. What can you do after your recovery to reward them for this assistance? Remember, you may need it again some day.
• Getting extended terms from suppliers. This can get you over the hump, and if your suppliers understand that an extension will help you stay in business and keep buying from them, they usually will try to help. Don’t threaten to take your business elsewhere; just explain you are in a slump. Ask them if they can charge your credit card on the next cycle, not the current one. Or ask if you can pay half now and half in 90 days rather than the full amount in 30 days.
• Credit card balance transfers. Most small businesses rely heavily on credit cards. If you have business cards, your credit card companies may have low-rate (e.g., 3 percent APR) balance transfers. Use these strategically only to bridge cash flow. It does cost money to use these, so they are not a permanent solution, and you don’t want to institutionalize them into your business model.
• Reduce expenses. This is a classic, but it’s typically done wrong. Things like “deferring” equipment maintenance will create more costs later. One firm “deferred” replacing tires on its company vehicles. Lucky for them, a police officer noticed the nearly bald tires on one truck and issued them a citation before someone was killed. Look at expenses that are not really necessary, and reduce or eliminate those. An example is using paper invoices. It costs less to invoice electronically.
• Set up electronic payments. Many companies issue checks against payables on a scheduled basis. They “do a check run” and this means a paper-based payment will usually take longer than an electronic one. Make it easy to pay you by direct deposit or other means, and you will speed up your collections.
• Get a traditional bank loan. You can find good rates with a regional or local bank, and chances are the loan officer will want to know quite a bit about your business before making the loan. That process of discovery, disclosure, and discussion may lead to insights that will improve your business because the loan officer interacts with many businesses.
• Offer something new. So you’re in a slump because the services you normally offer are in low demand this time of year. Why not offer something that is in low demand another time of year, but not this time of year? No idea what that might be? Invite some of your regular customers to lunch and ask them about their electrical needs.
• Contact previous customers. If you have a slump, they may have small projects that you can complete to make up for the lack of work you’re experiencing. But don’t go hat in hand asking, “Do you have any work we can do?” Look at the work history with customers. Then contact them and ask how that project is working out for them. Just starting this conversation should prompt customers to mention other projects they are considering. If that doesn’t happen, then ask, “Are you considering any similar projects? I think we have resources available now.”
Don’t let a cash crunch panic you into strapping the business with unaffordable “working capital” or other bad solutions. And don’t throw out that work force you worked hard to attract, train, and retain. Instead, look for ways to free up cash, speed up collections, and generate additional revenue.