Cash strapped? Don’t know what to do about it?

Tuesday, May 19th, 2009

In almost all the cases I’ve ever handled where businesses find themselves ‘cash-strapped’, I have realised that Owners/Managers invariably are unaware of just how costly it can actually be.

It is costly not only in terms of direct finance costs such as interest on overdrafts or loans, or charges by suppliers on overdue accounts, but there are a number of ‘hidden’ costs as well, and which can have far greater implications for the business in the longer term. These can be loosely described as:


For those of you who have experienced tough times, cash-flow-wise, you will know that EVERYONE in the organisation gets sucked into the problem. This includes:

  • Your switchboard operator who has to spend more time ‘explaining’ to irate suppliers why the accountant can’t answer every phone call, and
  • Your time is eventually taken up having to deal with piles of pending litigation. It also impacts on
  • Your Buyer/Storeman who can no longer buy from the best suppliers at the best discounts, or keep the shelves full of those fast-moving line items that provide the ‘bread-and-butter’ profits, and on
  • Your Sales staff who find they have to spend more time collecting outstanding debts, at the expense of building up their prospect lists.
  • In the manufacturing environment, much-needed maintenance on equipment is deferred until key machines break down, and production lines grind to a halt while you try to scratch together the funds necessary to fire up the plant again.
  • Your Accounting Staff spend inordinate amounts of time drawing up cash flow forecasts, and trying to allocate minimal funds to an ever-growing, and increasingly irritated, arrear creditors list. As a result, much-needed management information is restricted to the bare essentials of bookkeeping, financial statements are produced later and later, until eventually, no-one actually KNOWS how bad things really are. This is a prelude to disaster.


The cost of loan finance increases when options are limited. Banks, in particular, and one must assume that they are still lending at this stage, will lend at a premium in terms of rates, and will require everything they don’t have already, as collateral. The longer-term implications of signing personal guarantees and suretyships are never considered when the situation is ‘desperate’, so be aware what you’re getting into. (This can have dire consequences down the line!)

Early settlement discounts are forfeited. This can amount to as much as 5% in this day and age. It may not sound like much but when you realise that it is ‘per month’ – or 60% per annum – it takes on a whole new perspective.

Suppliers do talk to each other and it won’t be long before a policy of ‘price-loading’ is implemented. This simply means that inventory will cost more, as Suppliers gang together to cover their risk in supplying poor-payers. This in turn means lower margins, – until eventually, a Catch-22 situation develops.


The FIRST thing you must do is determine whether the business is actually making a profit, or whether it is capable of making a profit in the short term. If it is, particularly in its current difficult circumstances, then the potential for improvement is far greater once the Cash Flow problem is resolved.

Do this in the following way:

  • Thoroughly analyse costs to determine which are FIXED (those costs which will be incurred regardless of whether a sale takes place or not.), and those which are VARIABLE. (those costs which are only generated when a sale takes place.)
  • Wherever possible, try to CONVERT fixed costs into variable costs. This can sometimes be done using Labour Brokers, by paying commissions or performance-related salaries, and by out-sourcing special skills, all of which are linked to Sales.
  • Calculate the GROSS MARGIN generated by the surplus of Sales over variable costs as a percentage of Sales.
  • Compute the BREAK-EVEN SALES requirement by dividing the resultant fixed cost total by the gross margin.

SECONDLY, establish whether that profit is sufficient to meet the business’s arrear, and loan capital obligations in the short term. You must examine these commitments carefully. The monthly repayment of Five-year loans that still have a year to run includes a far greater capital component than interest. This lower interest charge has helped in improving your net profit margins, but if the VALUE of the profits is still not that great, it may be insufficient to meet the Capital portion of the loan repayment each month. Creditors, though they won’t be too happy about it, will accept longer terms of repayment if they know they are going to recover their money, so you need to know how long it will take to pay off this debt.

THIRD – and one must assume that by this stage a decision has been taken to keep the business afloat – a number of key management decisions must be taken:

  • Cash Flow management must be delegated to one person who will have the responsibility for maintaining good relationships with suppliers. The way to do this is to keep suppliers informed, pro-actively, bearing in mind that they are, to all intents and purposes, co-shareholders in your business. (in all but name!) This person should be someone who has the authority to make decisions and who has an assertive, confident personality. Remember, – you are still the customer!
  • Set up early warning systems with regard to cash flow, that are easily updated on a daily basis. We can help with this, so contact us!
  • All other Key positions must be released from their involvement in cash flow to focus on what they do best.
  • Specific areas for improvement must be targeted and tasks delegated to responsible persons with deadlines for achievement. These specific areas may well include:
    • speeding up the collection process,
    • maximising stock turn rates and
    • researching a Sales mix to focus on the most productive item lines, or even
    • to look at restructuring the organisation.
  • You, as the Owner/Manager must set yourself, and your key employees, some clear objectives.
    • Employees must be encouraged to come to you with solutions and not just problems.
    • Encourage lateral thinking, initiative and innovation.
    • Set short-term goals and plans and once achieved, evaluate the effectiveness thereof.
    • Implement a regular reporting system that is simple but effective.
    • Make sure that your marketing policy is still being implemented, and if so, that it is still relevant to the current market.
    • Human resources will also come under the microscope. It is difficult to lay people off – particularly those who have been with the company a long time. However, they may well be the reason for the tough times you’re going through – and unless you do something about it quickly, you may not have a company at all. Adopt a policy of employing excellent people – the very best you can get. John Maxwell, in his teaching entitled “Equipping for excellence” encourages one to employ excellent staff, even if there is no job tailor-made for them, on the basis that they will more than likely generate more income for one’s business than what they cost, in a very short time.
    • Set up important key performance indicators and monitor their movements once new policy has been implemented. In particular, have a close look at all assets to ensure that they are ‘earning their keep’.
    • Management financial statements must be kept up to date and accurate at all times.
    • Restrict spending to a minimum, making every cent a prisoner. Every time money is to be spent, ask yourself the question: “will this add value to the business?” If not – don’t spend it! Owners of businesses must set the pace in this regard – whether you believe it or not, employees will mimic the habits of their employers, even unconsciously! Funds saved on a regular basis soon add up.
    • Keep your bank manager happy by keeping him informed of developments, and never let him bounce a cheque. He can be your most important ally at this time – or your worst nightmare!!

LASTLY, though not exhaustively, once you’ve managed to overcome what should only be a short-term problem, continue with your new attitude until you have built up a ‘war-chest’ of reserve for the next time! (which hopefully won’t arrive!!)