10 Tips to Avoid a Cash Crisis

We’ve talked a lot about getting out of a cash crisis (The Three Rules of the Hole)… and what to do if you can’t (When to Stop Digging). With proper planning, you can avoid getting in the hole in the first place.

As you read this tips you’ll notice a few themes:

  • Just because there’s money in the bank, doesn’t mean it’s yours to spend it.
  • Understand where your money is going so you know how and when to cut back.
  • Understand the model and cycles of your business.

Here are the 10 tips to avoid a cash crisis.

1. Have an effective bookkeeping system so you understand where your money is coming and going. In order to manage cash flow, you must have an effective way of logging each and every cash inflow and outflow, and classifying it according to an system that makes sense to you and allows you to extract the information you need. Creating a detailed “paper trail” when the transactions occur is the only way you will realistically be able to aggregate and analyze the data effectively. QuickBooks is the most efficient tool to managing your books.  To get started, you can view my webinar here.

2. Understand the root of your cash flow issues before it becomes a crisis. If you ever start feeling like your cash buffer isn’t as high as you need to be comfortable, do some digging in your financial records to figure it out before “stuff” really hits the fan, and you can’t make payroll, for example. Here are a few common reasons why your cash flow may be suffering:

    1. Customers don’t pay on time (see #7)
    2. Poor planning for slow seasonal times. (see #5)
    3. You have more debt than the business can sustain. (see #3 and #10)
    4. You’ve let your expenses creep up (see #4, #6 and #9)

3. Don’t borrow against payroll or sales tax. Every day you’re collecting sales (or meals) tax from your customers. And every two weeks you’re deducting money from your employees’ paychecks to cover both employee and employer contributions of payroll taxes. This money can hang out in your checking account for several weeks before it’s remitted to the government. Just because the money is in your account, doesn’t mean it’s yours! It belongs to the government and you’re just the messenger. If you’re spending this money, you are essentially financing your business through a government tax loan. To avoid this situation:

    1. Have clear Taxes Payable accounts (meals tax, payroll tax) set up in your bookkeeping system and use them each time you log daily sales and payroll. When you look at your checking account make a note to deduct the amount of payables.
    2. Open a separate bank account to set aside the pass-through taxes. If you don’t see it in your checking account then there’s less temptation to spend it.

4. Understand your profit model and what it takes to break-even. I’ve been working with a client whose business is not yet profitable, and she has borrowed money from friends and family to stay afloat. The challenge is she doesn’t know where she needs to make changes because she doesn’t understand the profit model of her business. That is, what does she need to do to be profitable? Is it because her expenses are too high or revenues is too low? While the answer to both questions is likely “yes,” there are defined, targeted goals that she needs to achieve. It’s not just: “increase sales,” it’s increase sales to $XXX. It’s not just, “reduce expenses,” it’s reducing expenses to XX% of revenue. What are the target sales you need to cover your fixed costs like rent and insurance? What is the maximum you can spend on your variable costs like seeds and fertilizer (if you’re a farmer) or food and payroll (if you’re a restaurant)? In order to stay profitable, and maintain good cash flow, you need to understand the benchmarks of revenue and expenses for your business.

5. Know when your slow periods are and have a cash plan. All businesses face a slow period during certain times of the year. Crops stop producing with the autumn’s first frost, and farmers will see a dip in cash flow from November until March when CSA subscribers start sending in checks. And restaurants feel a lull in the height of winter and summer: when diners don’t leave their house because of snow, or leave to flee to vacation destinations. This can be a scary time if you haven’t planned for the period of low cash inflow; after all, the rent (and other expenses) still needs to be paid. When you have a period of good sales and cash, be sure to squirrel away some for the low periods. If you have a cash flow plan then you know how much extra cash you’ll need to cover the slow times (check out our “Quick and Dirty Cash Flow Projections” Tool).

6. Have a budget, and compare actuals to projections. A budget for how much and when you expect to spend money and bring in revenues is a great tool to make sure you stay cash positive. But projections can feel like “fairy dust” if you only look back at them once a year to see how close (or how far off) you were. Throughout the year,  review your projections and make adjustments. If you see that expenses are higher than anticipated, then you’ll need to cut back in the coming months to stay on track. If your revenue is better than anticipated, then perhaps you can make the capital improvements that you had otherwise delayed.   Further, adjusting your budget for the coming year according to your historical revenues and expenses will help you hone in on the realities of your business’ cash flow and can help you avoid a cash crisis.

7. Manage your Accounts Receivable. Accounts Receivable (or “A/R”, money that your customers owe you) can turn into a cash crisis quickly if not managed effectively. They are easy to forget about when managing day-to-day operations, you know you have made the sale, and you have delivered the product. But if you don’t have a clear policy in place on when payment of invoices to your customers are due or if you don’t invoice your clients on time, the actual payments can come trickling in more slowly than you expect, or not at all. If you have customers that consistently don’t pay their invoices on time, it’s completely reasonable to stop doing business with them. After all, it could mean the difference between you being cash solvent or in the hole.

8. Always look for ways to reduce expenses and increase revenue. Perhaps this one is an obvious Business 101 lesson, but it’s not always easy to think outside of the box when you are in a flow with respect to your business operations. Having trusted advisors that can help you identify potential areas of expense reduction and revenue enhancement can be a valuable way to keep your cash flow in a healthy positive state at all times.

9. Understand what it really costs you to produce your goods, and price them accordingly. You’ve gone through your books and realize that you need to earn $5 for every case of arugula or box of cookies you sell. But if you don’t know how much it costs to grow the arugula or bake the cookies, then you don’t know how to price your goods. And even if you know the cost of production, there are a few areas that entrepreneurs often miss when thinking about prices:

    1. How much do you waste? A sad reality is that everything you grow or make will not get sold, and much is it will end of in the compost bin. Factor in your “shrink” when setting your prices.
    2. Are you paying a sales commission? While this can drum up sales, it also eats into profits.
    3. Have you factored in the cost of packaging and shipping?

10. Never borrow money if you can’t afford the monthly payments. Borrowing money isn’t a bad thing. Often it’s the most efficient way to grow your business. But before you borrow money, make sure you can afford pay it back (both the principle and interest) through the profits of the growing operations of your business. We’ve got a handy tool to help you calculate debt service.

Ultimately, a significant portion of remaining cash positive in the food industry comes down to thorough and regular cash flow planning. To help, we’ve developed three cash flow planning tools specific to food and restaurant businesses, vegetable farms, and livestock farms.

How do you do planning? If you need help, give us a call or send a note.

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