How Small Business Owners Can Handle a Cash Shortage

By Jennifer Barnes, CEO of Optima Office, a company that provides fractional CFOs, COOs, controllers, and HR professionals for businesses.

Whether your business is growing or in recession, one of the potential hurdles to watch out for is a lack of cash. Lack of cash can prevent you from taking advantage of growth opportunities, and if it prevents you from meeting payroll, it can cause catastrophic damage to your team's morale. Making sure you have a constantly updated cash flow forecast can help you avoid shortages and plan ahead. You need to know well in advance that you are going to have a money crisis and there are many steps you can take to avoid it.

Always make sure you have a backup plan, such as a line of credit, traditional bank or SBA loan, one to three months of cash in your savings account, investors ready to give you funds if necessary or availability on your credit card in the worst case. If you are unable to obtain a line of credit or a traditional bank loan, then having alternative financing options would be the next best option. Many companies can offer you funds quickly at a higher rate or backed by your assets such as accounts receivable or inventory, which is a much better option than running out of money.

If you're doing a cash flow forecast and find you'll have slack periods where cash can be tight, here are three ways your accounting team can help you get to cash faster.

1. Master augmented reality.

You are not your customers' bank. Find a way to get your accounts receivable paid within 30 days. One tip is to print overdue invoices on pink paper. Accountants aren't fans of pink paper, so print the physical invoice on it, even stamp it with a red "overdue" stamp, and physically send the invoice to the customer.

This usually gets the attention of their accounting team quickly. Follow up with a phone call or, in the worst case, use a collection company.

2. Look for ways to cut costs.

You can run a general ledger detail from your accounting system and check for items you may have paid for and are no longer using. Membership fees and subscriptions are one area where you may find yourself paying for things you may not be using.

Look at your office supplies or office services where you might get a better deal. Do you pay for an HR service through the payroll company that charges you per employee, but you don't really use it often? There are hourly HR services that might suit you better.

Finally, take a look at the employees on your team. Are they fully exploited? Are they spending more time on administrative work than billable work, or are they generating revenue? You can easily take a look at what people are spending their time on and find ways to increase efficiency. You want people to focus on the job at hand and be productive members of your team, especially if you're short on cash.

3. Analyze your assets.

You might be surprised how often assets can turn into liabilities once they stop generating cash flow. If you don't see a return on investment, sell them and focus on assets that offer a better return on investment. If your current liabilities are less than your current assets, meaning you have a negative current ratio, then you are considered insolvent. This is something you need to fix quickly.

You need to find a way to break even and grow your assets so that they are greater than your liabilities or your business could be in serious trouble.

Sometimes this can also mean that you need to move inventory. Storing excess inventory for long periods of time can be costly. Doing a flash sale or getting rid of inventory that isn't working for you can be a great way to get cash that would otherwise take a lot longer to become liquid. Don't hoard inventory because you think it's worth more if you run out of money. This inventory can become very expensive if you don't liquidate it quickly enough.

If you've ever wished to see the future, you're in luck! Although you can never predict every possible outcome, the most likely financial futures are easy to identify with solid trading books and an experienced financial team. Don't wait until it's too late to solve your cash flow problems.