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How do you deal with a tight cashflow?

Our expert, Henry Ong, tells us how
By Henry Ong |

Q: My current cash flow is tight, and my business, a small neighborhood restaurant, does not have enough money to pay all its creditors. Please help me decide which ones to pay first.

A: When you are in a situation where business is slowing down and cash flow is tight, you need to carefully check all your costs and expenses and find out which ones are the most important. There are items that you need to pay ahead of some others because they are essential to running your business. In your restaurant business for example, you need to prioritize your food inventory, including spices and other ingredients. Obviously, without these items, you would not be able to serve anything on the table.

The other expenses that you need to consider are salaries. Pay your employees on time; otherwise, you might lose them one by one, and hiring new ones would result in unnecessary stress and additional costs, too. You also need to prioritize utilities expenses such as rentals, electricity and insurance. You don’t want to be ejected by your landlord or have your power cut off by Meralco.

In general, these are the expenses that you need to prioritize when your cash flow is limited. There are other expenses that may be particularly important to you that you need to settle immediately or else risk closing the business. One is payment of loans. If you borrowed money from the bank to finance your restaurant and you used your property as collateral, you might have to include the payment of debt amortization in your priority list.

Depending on your relationship with your financier, you may risk losing your property to foreclosure if you fail to make the payments with your bank regularly. After prioritizing your expenses, the next step you need to take is to evaluate each expense item and look for opportunities for savings. For example, you might find a way to lower your food costs by simplifying your menu. On the average, only 20 percent of your menu items contribute 80 percent of your sales.

If you could cut down the number of items in your menu, you could probably lower the amount of food supplies you need to keep in your inventory, hence lowering your cash outflow.

You can also examine your payroll costs. Do you really need all your food attendants now that business is slowing down? Evaluate your staff, and determine if you could lay off some of them to lower your payroll obligations. Consider hiring part-time food attendants to convert a portion of your fixed costs into variable costs. This way, you would have the flexibility to adjust the number of food attendants, hence cash outflow, based on the seasonality of the business.

To control your electricity costs, find ways on how to save on energy. Discuss this with your staff and solicit suggestions. Consider opening your restaurant only in the morning for breakfast market, if that is where bulk of your business comes from. Or you could consider opening only in the evening up to midnight if sales at night are higher. This way, you save not only on electricity but also on your other expenses as well.

For all other expenses, especially if you are on payment terms, talk to your suppliers and creditors and explore ways on how to extend your payables to them. If you have established a track record with your suppliers, it would not be difficult to negotiate for longer payment terms. The same with bank loans—you could try to lengthen the payment term or lower your interest rate to cut your monthly loan amortizations. If you have personal loans from friends and family, negotiate to restructure your payments; you could even offer them equity ownership if you think they could help you in the business aside from helping you financially.

Now that you know what to do with your expenses and how you want to prioritize them, use a spreadsheet to do simple cash budgeting. By using a cash budget, you can predict and plan your cash flow. Forecast your cash flow over the next few months so that you could prepare your game plan early. Preparing a cash budget may involve some knowledge in accounting. You may want to ask your bookkeeper to assist you or better hire a Certified Accounting Technician (CAT) to help you construct your cash flow budget.



Henry Ong, CMC, CMA, is president and COO of Business Sense, a business advisory firm that provides expert solutions to small and medium sized companies. You may reach him at or post your Money Matters question here.


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This article was originally published in the April 2011 issue of Entrepreneur Philippines.

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