How Entrepreneurs Can Survive a Cash-Flow Crisis

If you see a crunch coming, barter, liquidate inventory, ask clients for advance payments, and renegotiate vendor relationships, just for starters

By Jill Hamburg Coplan

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Peter Hoey

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If cash is king, the castle keep is looking pretty bare for entrepreneurs, grappling with a recession, a credit crisis, and the fallout from an unprecedented series of bank meltdowns. An October survey of business owners by PNC Financial Services Group (PNC) found 68% expected a cash crunch in the coming six months, up from 48% a year ago. Even businesses that are adding customers and shipping more product can be at risk if cash inflows lag outflows.

Naturally, you want to bill immediately, collect diligently, and enforce a credit policy that filters out undesirable customers. If that still isn't enough, turnaround experts have a few more ideas for surviving a cash crisis in uncertain times.

IF YOU SENSE TROUBLE...

1. Investigate your lender. Few banks are increasing lines of credit, but if your financial institution itself is in bad shape, "open up discussions immediately," says Allan Tepper, a CPA and finance consultant to small companies. "If they're not there for you, consider alternative lenders." You might also approach a credit union: Their lending is up 36% over last year.

2. Forewarned is forearmed. Get a cash-flow projection from your bookkeeper or accountant (or use accounting software to generate a simple one yourself) each month. From there, you can micromanage your cash position to get ahead of any huge payments. You could ask healthy customers to pay in 10 days rather than 30, in return for a discount. If you can afford it, offer 5% off for payment within five days (instead of the customary 2% for payment within 10 days), says Larry Rice, a CPA and director of strategic consulting with Rodman & Rodman in Newton, Mass. Just make sure the payment date is clear on the invoice.

3. Get payments in advance, and by credit card. Most clients will resist paying up front, but a few may prefer to pay a fixed amount per month rather than getting sandbagged with a large bill—and a few clients may be all you need. You can speed things up by asking for payment by credit card. Even in businesses that have not traditionally kept their customers' credit cards on file, it's becoming increasingly common to process payments automatically.

4. Tighten your belt, but make sure the cost-cutting measures don't show. Make Internet calls instead of using traditional phone carriers, and e-mail documents (in a secure file format) instead of printing and mailing them. Save energy by turning off computers and printers. In northern climes, program the thermostat to fire up the heat just before the workday begins and shut it off an hour before it ends, suggests Jennifer Kluge, president of the National Association for Business Resources, a membership association in chilly Warren, Mich.

WHEN CASH IS VANISHING...

1. Cut payroll, but be creative. You can't avoid scrutinizing your biggest expense, nor should you. But "keep the people you need and make sure they're happy," says Julie Lenzer Kirk, a former tech entrepreneur turned lecturer and consultant. Forgo raises and cash bonuses and instead offer days off, early Fridays, flextime or telecommuting benefits, or even an unpaid sabbatical or tuition reimbursement. You might create a four-day workweek, institute a no-overtime policy, or shift from a richer PPO health-care plan down to an HMO to survive the crunch.

2. Barter. Elizabeth Donley, CEO of Stemina Biomarker Discovery in Madison, Wis., barters with her software consultant: He does statistical and Web site work for her company, and in exchange, she lets him run his business out of her excess office space. That's netting her company $50,000 in savings over the length of the 15-month contract. If you can't work it out on your own, examine organized barter exchanges and networks (there are hundreds). Just be sure to put all agreements in writing and record them for tax purposes.

3. Renegotiate vendor relationships.