The phrase "Cash is King" has become a mantra in today's tougher economic times. Several readers of this column have begun to ask specific questions about why cash is so important. They want to know how they can improve cash flow, and what to do with the cash they're able to build up in their businesses.
There are four key reasons why watching cash flow in a business is more important than ever.
First, you can anticipate greater uncertainty of sales over the next several months. Most businesses are seeing smaller and less frequent purchases by customers.
Where a strong cash position is particularly important is during "sales shocks," which can occur when large, steady customers suddenly stop ordering. If this is because they have found a better price from a competitor, you have a chance to win them back. But, more and more businesses are waking up one morning to discover that one of their longtime customers has suffered a business failure.
Secondly, as I have written about in the past, bank credit is getting more difficult for small businesses to obtain and some entrepreneurs are beginning to have their loans called by their banks.
SBA loans are drying upThe news last week that the Small Business Administration loan program funding also is drying up makes finding credit even tougher. SBA loan funding is down more than 50 percent from this time last year. The SBA program offers guarantees for qualified small-business loans.
Third, just as your business may be feeling the effects of the economic slowdown, so are your suppliers. You should anticipate that your suppliers may begin to tighten their terms on trade credit to help shore up their cash flow.
Some may even begin to refuse to sell to you on credit, even if you have been paying on a timely basis in the past.
Finally, even in a bad economy you may find new opportunities. Don't count on any external sources such as banks or investors to fund new initiatives.
If you do not have the cash to fund expanding into new products, new markets, or even to buy up struggling competitors, you may not be able to pursue these opportunities.
If you do not do so already, watch your cash flow statements very carefully. And if the business starts to have consistent negative cash flow, you need to also measure and monitor how long your current cash will last.
Develop weekly, monthly and quarterly cash budgets to help make decisions on which bills need to get paid, or can get paid, and when.
In my next column, I will offer specific steps that can help to improve cash flow for a small business, even in a weak economy.
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