When business is thriving cash flows, payments don’t miss a beat and creditors are thrilled to get payments on time. Meanwhile, your own customers pay on time. There is an equilibrium that keeps everyone happy.
But we all know that things don’t always go the way we want.
What happens when cash flow slows, and the bills pile up? In this article, we’ll look at who will get paid and who won’t. Not a pretty choice. But one that is vital to business survival when cash is tight, or worse still, stops altogether.
When cash is rolling in
Business is booming, cash flows are smooth. The hardest thing to accept is that it will not always be like this. This is not negative thinking, but business sense.
Most businesses are cyclical, meaning that at some point there will be a downturn. And perhaps the best way to deal with this is to do so before it happens. Accept reality, have a plan, and ensure that you stick to it.
You must pay your creditors on time to ensure continuity of business. In addition, you need to make certain that there is no slippage in the payments received from your customers. Maintaining this good practice now, will make it much easier in the future.
If you give anybody the chance to take advantage of you, then in today’s tough market they will likely seize the opportunity. Make sure your actions are exactly as your intentions, consistency is vital.
To avoid issues, remember communication is key. Be prepared to discuss, but moreover be prepared to listen. A good business lesson is that we are born with two ears and one mouth, so you learn a lot more by listening than you do talking.
What are your customers trying to tell you? Are things going to get tough for them, and if so how do you act now? Extending credit that will never be met is not the right answer. However, a dynamic flexibility to business is; as your partners will welcome this open and honest approach when they deal with you.
When cash is tight
Times will get hard. When this happens, cash is the first thing to run out. And since you are reliant on this flow, your business will suffer.
Wouldn’t it be good if during the good times, you had built up a contingency reserve for this very moment? Of course, so make sure you did or start now.
But as cash flow decreases, those bills won’t. They’ll arrive on time every month without question. Your creditors may themselves be suffering and thus may lean a little heavier on you than in times past.
Could you preempt this by renegotiating with vendors before trouble begins? If you’re going to delay payments, be open about it. If necessary, dip into the newly established contingency fund. That is why you created it in the first place.
Not all creditors are created equal
You must realize who is at the top of a very important list of creditors. In the same way, who might be happy to be the last person getting paid. By happy, perhaps less upset would be more appropriate.
One approach is to apply a simple Rule of 3: Now, Later, Whenever, to creditors in order to determine who gets paid when.
This list includes employees, which depending on severity of the situation may need further prioritization. For example, sales reps are a priority since no sales equals no cash flow. The website team, if you run an ecommerce company, key creditors that have liens on your receivables or other assets without whom the business cannot continue, debts that you have personally guaranteed, and legal settlement payments.
Believe it or not there will be some that have always waited longer for payment. They operate on the basis that they will get paid in the end and pushing for quick payment may result in no payment at all. Those include creditors with a strong business model, great cash reserves, and established, larger companies who can handle small hiccups to a payment schedule.
The exact opposite are those that will demand payment right away at the top of their voice, and will continue to do so until they get it. Not unlike a bully, if you give in to them you will undoubtedly see them revert to this type of behavior time and again. So set a precedent now and enjoy some peace later. Going forward make it a business rule to not do business with bullies.
Finally, there are some businesses that forget who owes them anything at all, and if they cannot remember do not go out of your way to remind them. Do not forget that only once they make a formal request can they then take further action, if required. Rather than wake a sleeping giant, let them stay quiet. But don’t forget they will still be there once they have a wakeup call.
In short, anyone else not listed in the “later” and “whenever” pile earlier, and those who did the work without a contract or written agreement (that’s just bad business), or those who performed a service for you without expectation of payment (they do exist).
Like in life, running a business is easier if you put in the time and create plans for inevitable downturns. Run what-if scenarios for possible major events before they arise.
Ensure you recognize your staff and vital creditors. Keep communications open with vendors. Lastly, when you are able to, create a contingency fund for those inevitable bad times. Hopefully you’ll never need to tap into that fund, but it is certain that those who have failed never had one to fall back on in the first place.
This article has been edited.
Bob Shoyhet is a Chief Financial Officer who’s been working with companies ranging from $0 to $100M+ for over 25 years. His expertise is focused on profit maximization, which puts him in a unique position of understanding what businesses should do to get off the ground, and how to position themselves to achieve next level growth. He currently works at Melillo Consulting, an IT Solutions provider serving Fortune 1000 companies. Connect with @bobshoyhet on Twitter.