3 Rules of Cash for Small Businesses
To keep your business solvent through the COVID-19 pandemic, staying focused on the 3 rules of cash is worth the time and effort. Here's a refresher on the basic strategies of the 3 rules of cash.
Cash now is better than cash later
Decreasing cash flow for many of your customers means you’ll likely have trouble collecting 100% of your accounts receivable in the short term. But don’t overlook clients whose cash flow or revenue has yet to be dramatically affected by the pandemic or who have a big enough emergency fund to pay most of their bills for several months.
What to do now: Be compassionate, but don’t stop your A/R collection efforts. You need as much cash as possible now, not later. You likely have some customers who can still pay your invoices. So actively communicate with key customers and consider offering slightly better terms to receive payments earlier than normal. Also look to suppliers to extend payment terms with them. By working together, you can find unlikely partners to help you both through this hardship.
More cash is better than less cash
It is important to build your cash reserves now more than ever. While difficult after the pandemic hits your business, it is not impossible. Review every asset on your balance sheet – accounts receivable, prepaid expenses, fixed assets, and inventory. Determine what it would take to convert each of them to cash.
What to do now: Consider leveraging these assets with your bank as a line of credit. Also talk to your lenders about the possibility to postpone several months of loan payments. Perhaps your bank will take interest only payments. Ask suppliers who will give you discounts for paying on time during the pandemic. Get involved in your bill paying process and pay bills on time, never early. And think long-term, any ideas to build up your cash now will only help later.
Don’t run out of cash
According to a 2019 survey by The Service Corps of Retired Executives, 82% of small businesses that eventually fail do so because they run out of money. So it is critical to constantly forecast your business’s worst-case scenario and figure out how much cash you need to keep your doors open. Then take steps to protect your business before you run out of cash.
What to do now: Start by prioritizing your business’s expenses. Know who you have to pay and who can be delayed. Identify expenses you can cut and in what order they should be cut. Use your forecast as an early warning system to determine when to start these cuts, if you haven't already done so.