Q: I’m currently having a cash crunch and I don’t have a lot of fund sources to turn to. I’m thinking of either delaying payment to my suppliers or delaying my employees’ salaries. What do I do?
A:Before you start thinking of doing either move, find out first the reason why you are having a cash crunch. Is your business losing customers? Are you managing your cash collections well? Do you conduct regular audits to detect potential fraud in your company? These are important issues that you should address first, as they could give you the solution to your cash flow problems.
If your sales has been declining consistently for the past few months, then you need to evaluate whether it is still feasible to continue operating your business. Your problem may be marketing-related. Perhaps you need to promote your products or services to boost your business. You may need to offer discounts too, to attract customers. There is no need to delay payments because this would only lead you to more losses. You can simply close your business and move on. When you close your business, you save some cash that you can use to start a new business.
If your business is doing well and yet you have problems with cash flows, check if your business is actually profitable. There are many businesses that do not have good accounting systems, and thus their owners are not aware of how much profit they make. In fact, many entrepreneurs operate their businesses without doing regular financial statements. Most of the time, small business owners rely on cash flows without actually looking at the bottom line. They tend to equate cash flows with income, which is not correct. If you are one of them, it is time to audit your business and draw up financial statements. This way, you can correctly analyze and point out potential problems in your business.
For example, you may notice that your gross profit margin is way off the industry benchmark. You may be pricing your products too low. Too low margins won’t be sufficient to cover your operating expenses. Or your degree of leverage (loans or debts) may be too high, meaning you need to reach a sales volume just to break even. If your business is just doing above break-even, then there is good reason to expect that your cash flows will be low.