A sudden cash contraction is usually caused by poor sales, lower profit margins, past-due accounts receivable, bloated inventory, and/or restricted credit lines. What are some effective ways that a cash-strapped business can keep its checking account in positive territory? Generally speaking, your options fall into two broad categories: spend less and take in more. And then, there’s always borrowing to supplement cash flow.
During an economic downturn, customers, suppliers, lenders, and investors all simultaneously try to hoard cash. This can mean that even if your business is showing a bottom-line profit, you might have an empty bank account and no funds to pay bills. And if your sales have dropped to the point where you’re in the red, you can be sure your cash problems will be even worse. Okay, so far we may not have told you anything you don’t already know. But hopefully here are a few ways to raise cash you might not have thought of.
Get Cash Out of Inventory
You can’t afford to allow too much cash to be tied up in a warehouse or shop. Whether you are a manufacturer, wholesaler, or retailer, if your sales dropped recently, chances are you now have too much inventory. That means the cash you so desperately need is sitting in your store or warehouse in an illiquid form. To convert it to pieces of paper with pictures of dead presidents, take some or all of these steps:
- Begin an energetic guerilla marketing campaign to coax more customers to buy more of what you are selling. One of the most effective ways to do this is to ask for support from your long-term customers.
- Consider unloading dead inventory to deep-discount resellers such as liquidators, dollar stores, or even flea market operators. Even a few cents on the dollar is better than a truckload of unsalable items.
- Hold a blowout sale offering enticing discounts on slow-moving items. But remember that your goal is not only to reduce inventory, but also to make a profit. So be sure to surround sale items with attractive goods that you discount only slightly.
EXAMPLE: Bangkok Designs, a clothing importer, has a warehouse and retail store overloaded with women’s wear. Holding a three-day warehouse sale, in which a few items of essentially unsalable merchandise are marked down as much as 90%, other hard-to-move items are discounted 50%, but the more popular intimate wear is reduced only 20%, Bangkok is able to pull in a quick $30,000.
Coax Customers to Prepay
Health clubs, movie theaters, and car washes have for years given people an incentive to pay in advance for discounted services. For example, a theater might offer ten shows for the price of seven if you buy a coupon book. A health club might give you three months free if you join for a year.
Although many types of businesses have not traditionally marketed this way, offering discounts for prepayment, it’s time they thought about this highly effective way to raise quick cash. So whether you are a landscaper, a physical therapist, or a paper box company, figure out a way you can sensibly encourage your customers to give you their cash ahead of time.
EXAMPLE: In January, always its worst sales month, Sugimoto Pool and Pond, a business that maintains swimming pools and decorative ponds, offers its customers a card worth 120% of its face value, redeemable anytime during the next year. When 35% of its customers sign up, Sugimoto has enough money to pay off the debt accumulated by virtue of its poorly timed expansion.
Give a Discount for Prompt Payment
Especially when times are tough, many customers will appreciate and take advantage of discounts for early payment. If you need cash, offering a discount of 5% or more can make sense for payments on the day goods are received or services rendered. Even a 2% to 3% discount for bills paid within ten days can be a substantial motivation to pay a bill PDQ.
Collect Overdue Accounts Receivable
When lots of your customers are past due in their payments, it’s almost always as much your fault as it is theirs. Even in a poor economy, efficient account management practices should result in most customers paying you on time. Put more bluntly, canny businesspeople avoid training their customers that it’s okay to pay late, by taking quick action to penalize them. If you haven’t done this, it’s past time you started.
Dial for dollars. If you already have lots of overdue accounts, you’ll need not only to fix your long-term policies, but also get a bunch of customers to pay pronto. Especially if you are seriously short of cash, your best bet is to pick up the phone. Whether you are a consultant calling a late-paying client, a landscape architect calling a homeowner, a wholesaler calling a retailer, or a small manufacturer calling a wholesaler, demand to talk to the person who owes you the money, or in the case of a business, the person with power to write the check. Don’t be bashful—the delinquent payer absolutely needs to know that you need a check (or electronic payment) now and in full, or you’ll immediately take legal steps to collect. Don’t be fobbed off with excuses or vague promises that you’ll be paid soon.
Withhold goods or services. If, after several phone calls, the money is still not forthcoming, what are your realistic options? It depends in part on what type of business you run and whether the customer needs more of what you sell. For example, if you produce a highly popular product or provide a service your customer needs more of, your first step is to put late-payers on credit hold—that is, don’t provide more goods or services until the account is fully current. The credit hold approach might not work if there are more local suppliers of the product or service you provide. For example, if yours is one of several wholesalers that delivers fish to area restaurants and you put Ahi Bill’s cafe on credit hold, Bill can buy from one of the other wholesalers. In practice, however, the other wholesalers are sure to know that he is one of your longtime customers, suspect that you have put him on credit hold, and call to check his credit. In short, if Bill is to stay in business he is going to have to pay you.
Offer a one-time discount in exchange for catching up with back payments. For example, a consultant, architect, or landscaper might offer a 10% to 20% discount for immediate payment on overdue accounts receivable. To encourage participation, when providing the carrot, don’t be afraid to also show the stick by threatening to file a lawsuit or to turn the account over to a collection agency.
Sue, or hire a lawyer. Especially for large overdue accounts, get the recalcitrant debtor’s immediate attention by suing in small claims court. In most states, the limit on claims is $5,000 to $10,000, and you don’t need a lawyer. Or hire a lawyer to collect it for you, either for an hourly fee or a percentage of the amount collected (pay by the hour if the debt is large and the debtor is solvent). If you are lucky, a frosty letter or two from an attorney will shake loose your cash without a lawsuit being filed.
Turn accounts over to a collection agency. For smaller, seriously past-due debts that you’re not interested in taking to court, your best bet is to turn them over to a collection agency. These agencies normally charge about 50% of the amount they collect. Talk to local businesspeople to get a recommendation for an agency with a good reputation for both doggedness and ethical behavior.
During hard times, businesses typically must lower prices in order to attract customers. But especially for businesses that offer a wide array of goods or services, there are always some items for which prices can be raised. Often this results from the fact that during prosperous years, businesses neglect to do a careful analysis of all their prices.
As a general rule, prices designed to attract customers to your shop, office, or website should be kept as low as possible. Be more aggressive when you price discretionary items customers might purchase once they’re there. For example, a yarn shop might feature rock-bottom prices on basic, single-color yarns, while keeping prices up for the luminescent, multihued varieties customers gravitate to once through the door.
EXAMPLE: Koski Firewood is forced to lower prices for cords of oak after an aggressive competitor with a wood yard on a main road puts up a huge sign advertising bargain prices. As a result, profit margins all but disappear, causing Pete and Mike Koski to consider closing down. But before they do, they consult with their informal group of advisers including their retired Uncle Frank, who has successfully run several businesses. Frank spends a day at the wood yard and comes up with these recommendations, which, taken together, put the business solidly back in the black.
- Raise prices on kindling 30%. Almost everyone adds several boxes to their order, but few pay close attention to its cost.
- Raise the delivery fee 40%. The super-frugal will borrow a pickup and haul their own wood, but most others won’t notice.
- Add $20 to the fee for moving wood from curb or driveway and stacking it next to the house. Most people do this themselves, but those who can’t be bothered will pay more.
Another place to look to raise prices is for goods or services that, despite—or maybe even because of—the economy, are in high demand. For example, a CPA might lower rates for basic tax schedule preparation so as not to lose business to price-cutting competitors, but raise fees for helping small businesses prepare bankruptcy-related schedules or deal with IRS tax bills.