3 Ways to Avoid the Dreaded Cash Crunch – No. 1 Is Critical!

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If ever there was a pop culture phenomenon, the final few episodes of Breaking Bad was it. The tale of mild-mannered chemistry teacher Walter White’s transformation into a drug kingpin made for some great television. Indeed, the whole country seemed to get caught up in the tale, even if most viewers had a tough time relating to Walt.

Or did they?

Oh sure, the murders, meth, and mayhem were outside the realm of reality for most of us, but what about Walt burying his fortune in the desert? ($80 million!) We couldn’t relate to that, could we?

It turns out we could.

Check it out: According to the latest Staples Small Business Survey (Staples is one of our sponsors), 65% of small business owners have hidden money someplace at one time or another. The most common spots?

  • Desk drawer (19%)
  • On themselves (13%)
  • Undisclosed location (44%)

More than a quarter of the respondents in the Staples survey said that they “lose sleep” over cash flow issues…

That survey contained a lot of interesting tidbits about the state of small business today. One area that I found particularly interesting had to do with money and finances. This month, the Staples Business Hub (a great resource that you should check out if you haven’t already) is focusing on cash flow and money management. And that’s a good thing, because according to the survey, that is an area where many small business owners need help.

More than a quarter of the respondents in the Staples survey said that they “lose sleep” over cash flow issues. Twenty-eight percent said they postpone hiring because of cash flow problems, and almost half said that they will pay others, including employees, before they will pay themselves. This too is an issue of cash flow.

Back when I practiced law (I am a recovering lawyer today, thank you very much), I handled a lot of bankruptcy cases. Almost inevitably, the small business owners who came through my doors had been done in by a cash flow problem of one sort or another. It might have been that they lost a big client, or they got overextended on credit cards, or whatever, but the fact is, a cash crunch often proved to be the death knell of the business.

So this then begs the question: How do you avoid cash flow problems?

Here are three ways:

1. Diversify your income: An investor would never own just one stock, right? That stock might go up, but it might go down too. Owning a single stock is a recipe for investment disaster, and that is why people are always told to diversify their portfolio. Owning several stocks in different sectors is a hedge against a single stock or investment bringing down the whole portfolio.

Well, the same should be true in your business. If you only have one way to bring in a dollar, you risk running into the dreaded cash crunch when business for that product or service slows down. For instance, an ice cream store needs to have ways to make money in the winter because that is when ice cream sales really drop off. The shop could sell, for instance, coffee and hot chocolate, or offer donuts, etc.

If you diversify your small business portfolio, you can much more easily avoid the cash crunch.

2. Get a line of credit: A line of credit from your bank is an easy and smart way to even-out any cash flow problems you might have. The great thing about a line of credit is that if you don’t need to use it, you don’t have to, but when you do need it, it’s there. Again, if for example you have a seasonal business, a line of credit can help you when business slows down, and you can then pay it off when business picks up.

3. Consider factoring: One reason small businesses sometimes face cash flow issues is that, while they may have money due them (accounts receivable), customers and clients do not always pay on time. So there is a lag between doing the work and getting paid, and that leads to a cash crunch.

What to do?

Use factoring. Factoring is when you sell your accounts receivables to a company (called a “factor”). The factor will immediately pay you most of the money you are owed so you don’t have to wait any longer to get paid. I say “most of what you are owed” because a factor pays less than 100 cents on the dollar, usually something like 95%, but in return, the factor is the one who waits for the payment.

The good news is that, while the Staples Small Business Survey indicates that cash flow is an issue for many small businesses, with a little advanced planning, cash crunches should become a thing of the past.