The harsh reality of today’s business environment is that many companies are forced to shut down even though they have a solid customer base and years of positive growth. Some companies simply run out of money to pay bills. Cash flow problems are one of the major killers of small businesses in the
Higher lumber and nail prices are squeezing on one end while customers trying to see how long they can hold out payments are putting pressure on the other. Pallet companies are increasingly finding themselves in the type of cash crunch that has tormented sawmills over the past several years. More
I have noticed that there are two types of people in this world when it comes to money. There are those who plan ahead and are ready to take advantage of others’ misfortune. And there are those who get taken advantage of because they are always putting out fires or having just enough money to pay the bills. My brother recently told me about something he was thinking about buying for a sound company he runs as a side business. I asked him why he didn’t just buy it now. He said that he was going to wait until winter came and the guy needed a little extra cash for Christmas time. He said that the other guy would be more likely to bargain then. My brother tends to always get good deals because he plans ahead and understands the value of timing.
The best way to avoid the cash flow crunch is to be proactive and develop a comprehensive cash management plan. Companies tend to fall into the cash trap because they are so focused on
Good cash management starts with analyzing your billing, collections and payment systems. Make sure these systems are operating as efficiently as possible. Bill promptly, aggressively follow up on overdue invoices, and establish the best payment terms with customers and suppliers as possible. Organize your billing schedule and stick to it. Some companies offer discounts if customers pay quickly. Some are able to demand payment upon receipt. The market tends to dictate what you can get away with. As logs and lumber becomes harder to get, those who do not pay promptly will find it more difficult to get raw material. Cash flow will likely play a big factor in who gets squeezed out of the market in the future.
You can do things to reduce expenditures like check pricing for major expenses or maybe renegotiate terms with major suppliers. Some companies join together to form a buying cooperative or even merge to take advantage of having greater purchasing power on the market. Leasing machinery and business equipment has become increasingly popular in recent years. While leasing generally costs more than buying, it keeps you from tying up cash or lines of credit that can be used in better places.
Some companies get cash strapped because they invest money in boom times without thinking about the penalties of pulling it out if they ever really need it. Don’t take huge risks when investing spare cash, especially given the escalating lumber prices. Consider staggering maturity dates for various investments, such as certificates of deposit, or utilize more liquid investment options such as sweep accounts. Develop a contingency fund for unexpected expenses.
Another source of cash is a local bank. It can really pay off on a rainy day to have a good relationship with a local banker. The ideal time to do this is when things are going well, not when cash gets tight. If you have a line of credit, you may be able to buy when the price is right or have enough capital to expand when others are cutting back.
Be smart, plan ahead and avoid the cash flow crunch!
