Not even the giant, world-spanning and world-famous corporations operate at a profit every month of every year. Sometimes they even lose money and experience negative cash flow on purpose (going cash negative for a quarter or even a year while investing in something that will produce massive profits in the future). There’s no reason your business should be different.
But the situation is scary, and time-sensitive.
When you’re running this race between the inevitable closure of your company and the payoff from the investments putting you in the red, there’s one big question: where is the finish line, and can you reach it? The bad news is there’s no single, one-size-fits-all answer to that question. The good news is we can ask more specific questions to help you find the answer that fits your business the best.
What Do the Cash Flow Numbers Tell You?
At its heart, this is a simple equation:
- How much money are you losing each month?
- How much money or credit do you have as reserves?
Divide 2 by 1 and you have your answer. If you’re losing $5,000 a month and have $60,000 in reserves, you can operate for about a year.
If it was all that simple, this would be a very short article – but you need to temper that estimate with a variety of other factors.
Your Guide to Cash Flow Management
What “Bonus Cash” is Coming In?
Do you anticipate any windfalls in your time horizon that could extend that deadline? Is there a reliable large order that comes once a year? Or a new client who’ll pay a setup fee? Are you willing to put a tax refund (if any) into the business? Have you gotten a new credit line, or acquired an investor? Each of these points will increase your reserves and extend how long you can keep treading water before the business can swim.
On the opposite side of this cash flow coin, are there major expenses coming your way that aren’t part of your monthly calculations? Tax bills, major repairs and annual association dues or insurance payments are examples of this. Each of these can reduce your reserves and bring close of business closer.
What Expenses Can You Cut?
Look hard for opportunities to reduce your bottom line. Just like a family might cancel their cable bill to help cover Junior’s college costs, your company can slash nonessential services (and even owner perks) to reduce how much red you have at the end of each month. Finding a way to save even $500 per month can extend your expected life span.
While you’re at it, keep looking for ways to increase income via new clients, up-selling existing customers and entering new markets. If you’re $5,000 in the hole each month with $60,000 of reserves, an extra $500 in billings gives you another month of operations.
How Can You Extend?
Can you do something to extend when some of your business expenses are due? Vendor factoring and other short-term solutions usually aren’t much use here, since the extension isn’t likely to last long enough to be helpful. Instead, look at ways to put off payment until after your “finish line date.”
Some of these opportunities aren’t as simple as asking a vendor for an extension. Taking on more business credit, getting a cash infusion from a new investor or putting more of your personal funds into the business are all other ways to extend.
An extension either cuts immediate expenses (thus reducing how much you lose monthly), or adds to your reserves, or both. It can feel like a lifesaver at the time, but is really like drinking coffee. Coffee doesn’t make you less tired. It puts off the moment when the tiredness kicks in. Be very careful about the false sense of security extensions can create, and make smart decisions.
How Reliable Is Your Finish Line Estimate?
This is the final, but perhaps most important question. You’ve set a date by which you believe your company will turn a profit. How much do you trust that date?
If, for example, you have a signed contract starting in six months with a new client who can single-handedly put your company in the black…then it’s worth making many sacrifices and taking on some debt to make that number. Similarly, if your income is growing by 5 percent a month and you need only a 50 percent increase to become profitable…do whatever is necessary to still be open 10 months from now.
But if your “finish line estimate” is more of a guess or a hope, you have two choices:
- Accept that your business model is not functional. Close your business soon, or radically alter the model so you can be profitable.
- Find out how to have a more concrete and reliable finish line.
For a business operating consistently in the negative cash flow sector with no end in sight, we don’t recommend borrowing money until you’ve come up with a plan for future success. Doing so only means you have farther to fall when the end finally comes. But if you do have a plan for profit, a Kabbage small business loan or line of credit can provide the funds for success you don’t have in your bank account today. Click here to find out everything you need to know.