5 Ways to Weather a Cash Flow Drought

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You have $2,500 in ready cash. That’s the good news. The bad news? About $10,000 in payroll, quarterly taxes, and bank interest payments are due tomorrow. You’re already behind on the phone bill, and your association memberships and magazine subscriptions have all expired.

Near bankruptcy? No, but you could certainly use some relief from this stressful situation.

When you’re running your business on a shoestring budget, you may find yourself operating in two cycles: one of elation or one of despair. Sure, all it takes is a few late-payers to slow down your enterprise, but it doesn’t have to crush your spirit.

Remember, you’re a bootstrapper. You’ve made it this far by relying more on your wit rather than a checkbook balance. You can victoriously press through this difficult situation. First, take a deep breath and gather your resolve. Second, begin to put your persuasive and creative energies to work so you can survive the drought. Here’s how.

Get Your Priorities In Order
Half the battle is knowing who must absolutely be paid first. Focus on legal and credit obligations. As an employer, you should always meet payroll. Besides maintaining goodwill with your staffers, many states carry “timeliness rules” that come with penalties when violated. And then there’s the IRS, which requires that you make timely payroll deposits and frowns on (read: penalizes) non-compliance. If you’ve set up a retirement plan that includes your employees, forget about using plan contribution funds to ride out a financial crisis; it’s a violation of federal pension law. Thinking about missing your quarterly tax payments? Don’t. If your estimates don’t balance out in the end, you’ll be penalized, and catching up on missed payments can be difficult.

A bad credit history can stifle your business, so avoid ruining yours. Think twice about not paying at least the minimum on credit cards, bank equity lines, insurance premiums, and auto or equipment leases, advises John Johanson, marketing director for Mid-Continent Agencies, Inc., one of the country’s largest credit and collection services for businesses in Rolling Meadows, IL. These are double-whammy creditors: they quickly report your delinquencies to the bureaus, and they’re heavy-handed–stopping your service or coverage and even repossessing their goods.

Bootstrapper Joel McIntosh, of Prufrock Press, a publishing firm in Waco, TX, has mastered the art of juggling payments. “No matter how creative I’ve gotten, we’ve maintained a good relationship with our suppliers and have a strong Dunn & Bradstreet rating,” McIntosh says. His credo: First comes payroll, next the bank, followed by the lease, and then his American Express and corporate Visa.

Know When to Push the Envelope
You, too, can still manage your bills during a cash crunch and remain in good standing with your vendors. Remember, every creditor has its threshold, defined by collection muscle or industry standards. The accounts Mid-Continent Agencies receives, for example, are usually more than 90 days past due, with some leaning towards 100 to 120 days. Johanson says that many companies don’t even pursue a past-due account until it’s at least 60 days late.

It’s commonplace for some creditors to send you a 30-day term invoice while considering 45 to 60 days a satisfactory payment. It’s important to know the protocol of your marketplace and work it to your advantage.

Try finding grace with your smaller vendors. If you’re running short and are 35 to 45 days late, try waiting to determine their threshold. Make a note for future reference as to when you received the first follow-up call or letter. For example, if the vendor called you when you were 45 days past due, the next time you’re in a pinch you could aim at paying them somewhere in between 35 to 40 days. Remember, though, paying late may come with its penalties. When spreading out your obligations, always factor in additional late fees and interest, and pay off your most expensive debts first.

Boldly Negotiate Relief for Yourself
Successful bootstrappers are notorious for garnering the support they need. Be up front about your cash position–you may be surprised at how cooperative your suppliers can be. For example, long-distance phone carrier MCI offers its small-business customers preferred billing cycle options. You choose when your bill is dated, working around your receivables. Some suppliers will offer you extended payment arrangements, if you ask. It really is a buyer’s market these days. Suppliers are competing fiercely for your business, so someone is bound to work with you. It’s up to you, however, to spell out what you need.

Naimah Jones, president and CEO of Naimah Cosmetics in Los Angeles, is an example of a bootstrapper who boldly recruited others to help support her cause. After selling a major Southern California department store on her idea for a cosmetics line, Jones was faced with a tiny dilemma: She needed to have sample products manufactured so she could present them at the next buyer’s meeting. Jones persuaded a manufacturer to produce her samples based on the store’s mere interest, and later produce enough product to fill an $80,000 order. And to top it off, Jones got the manufacturer to wait six months until she got paid.

Build Up Your Credibility
Before you pick up the phone to sound the horn, determine whether your cash crunch is short- or long-term–is the check coming in three weeks or three months? You don’t want to make your vendors more nervous than they should be. Alerting everyone as soon as you’re in trouble may hurt you more than it should. Your vendors may start spreading the word that you’re having problems.

You’ll need some credibility to burn when times get tough, though. A rule of thumb: If your money is delayed for two months or longer, call your vendors to explain the situation. McIntosh, for instance, stays in good stead by paying earlier or according to terms in his cash rich months and averaging 45-day payments in the other months. His other rule: whenever a vendor calls about a past-due bill, McIntosh sets a date he can meet and always cuts and mails the check by then, establishing himself as a person of his word.

Spell Out Your Safeguards
There are two types of liquid cash: cash that’s under your pillow and sources you can pull from. Make a list of ways you can generate some cash. Examples: Get a loan from loved ones, take or do part-time or odd jobs, host a garage sale, apply for an equity line or other financing, or take an interest-free cash advance from a 25-day cycled credit card. This process can give you a psychological boost as well as provide you with a ready supply of solutions when your capital is thin.

Finally, always tend to the business of collecting your money from others. Standard operating procedure:

Collect project deposits and progress payments.
Submit invoice and back up in the right form and to the proper company representative, so there’s no delay in processing your payment.
Make sure you and your clients understand (and agree on) the payment terms.
Follow up with a payment call the first day after an invoice is due.
Never agree to any financial arrangements that you cannot afford to honor or underwrite.

Try it, you’ll be better funded (and happier) when you do.

Kimberly Stanséll is a Los Angeles-based businesswoman and author of Bootstrapper’s Success Secrets: 151 Tactics for Building Your Business on a Shoestring Budget (Career Press, $13.99, 800-CAREER-1). E-mail her at: KmberlyNLA@hotmail.com.