Accumulating Cash and Improving Your Business’ Cash Flow

Part 2 of a 5-part series: Options for Small Business Owners in Financial Distress

Cash is how your business likely will get through its difficulties. Simply put, obtain as much cash as you can, and spend it sparingly.

In Part 1 of this five-part series on options for small business owners in financial distress, I suggested some ideas about improving the operation of your small business in order to survive different types of disasters. In Part 2, I’ll share some thoughts on improving your cash position and cash flow.

First, look at your business as a source of cash.

• Account receivables: Contact your customers with outstanding account receivables and encourage them to make payment. Provide discounts for prompt payment and charge interest on past due amounts if you can.
• Line of credit: If you have unused room on a line of credit, draw on it now while you still can. If things get bad enough, your lender might freeze your line and cut off further draws.
• Business loan: If you need to approach a lender for a new loan or an increase in an existing one, do your homework. No lender is going to give you money just because you ask for it.
• Business plan: Prepare a business plan or update your current plan to reflect current conditions. You may need help from your accountant, attorney, consultant or similar outside sources in order to do so. Your plan may include both a “needs” list and a “wants” list.
• How much? Determine how much money you need to implement your plan whether your business plan is to simply tread water, grow, or pivot in another direction. Break it down so your potential lender understands how it is going to save your business.
• How to pay it back? Once you have a rough number, consider how you’re going to repay it. Your business’ survival depends in part on its ability to pay its debts. Consider both the amount and duration of the likely payments.
• Avoid “hard money” lenders: When looking for lenders, be very careful to avoid “hard money” lenders and their draconian interest rates and repayment schedules. These can include factoring companies who purchase your receivables, MCA lenders who say they are “purchasing” your accounts receivable but in reality are lending against them, and other types of lenders with outrageous interest rates and impossible repayment terms.

Some of these lenders want authorization to pull a payment from the business bank account on a daily basis. You don’t know if you’ll have the required funds in your account on any given day. Your goal is to conserve cash, not to send it out to lenders.

Some lenders even want you to pre-sign a consent judgment against the company and guarantors, so they don’t have to go to any effort at all to start collecting.

My general rule is if the loan is needed to tide you over to the receipt of a big receivable or some other source of funds which definitely will be arriving soon, these are safe to consider because the loan will be in place only for a short term.

BUT if you’re intending to use this type of lender for longer term financing, I would avoid hard-money loans. Better to close the business now, on your terms, than to suffer through the turmoil of having closure thrust upon you when you become unable to meet the repayment terms.

• Investors: Another source of funds would be investors. It is important to work through your attorneys if you decide to seek investors as it is easy to violate both state and federal securities laws if you don’t do it properly.
• Self-fund or borrow from friends and family: Another option for obtaining cash is to self-fund or borrow from friends and family. Again, I urge caution, because family issues are involved, not just financial.
  • Consider what might happen if you are unable to repay the loan. What will Thanksgiving dinner be like after that?
  • Take care of yourself before you take care of your business. Make sure you have enough to live on before lending to your business. In either case, treat the loan as a real loan. There should be a real promissory note drafted, and you or your relative should take collateral if the business has any to provide.
  • And don’t raid your 401(k) or retirement IRA funds. That money cannot be reached by creditors and you may well need it to live on some day. Or, you may want to borrow against it in order to settle some personal guarantees and avoid a personal bankruptcy. Notice I said “borrow” and not “withdraw.” You will incur taxes on any amounts of your 401(k) or IRAs that you pull out of your account and there is a 10% penalty if you are under 59.5 years old. However, you may be able to avoid taxes and penalties by borrowing against your 401(k) rather than withdrawing from it. Check with someone knowledgeable about those details.
  • The same applies to your cash-value life insurance. In Missouri, cash value in a life insurance policy which you own is exempt up to $150,000. Save it for a rainy day.
• SBA Resources: The SBA has provided information on resources for small businesses at https://www.sba.gov/sites/default/files/2020-09/ResourceGuideSummerNational2020.pdf    

Once you have accumulated cash, you want to preserve it for essential business operations. There are a number options to consider and not all of them will work for everybody.

• Monitor your cash flow and forecast it monthly to be sure that your anticipated income will cover your anticipated expenses. If it won’t, contact your creditors before you are late and ask for better terms.
• Eliminate nonessential expenses as well as capital expenses. Review all of your expenses and ask yourself whether each is essential or just nice. Don’t implement expansion plans unless 1) you have the demand and 2) you can afford to cover the debt.
  • Look at capital purchases as an opportunity to improve cash flow. Have you been keeping up with the technology in your area? Perhaps some capital improvements would be in order if they would allow you to increase your production, reduce waste, or confer some other benefit on the business.
  • Can you reduce your space needs and thereby reduce your rental costs?
  • Do you have any unused or underutilized equipment you can sell? Any old inventory you could sell at a discount?
  • What about reducing your advertising or promotional expenses? Although the experts disagree, it seems to me that this generally is not a good idea, even in bad times. You need to stay in front of your customers, and you can’t do that without marketing. Especially if you have “pivoted” by modifying your product line or service, or changed how you’ve been dealing with customers, you actually might want to increase your advertising budget to let them know.
• Another idea is to make changes that don’t cost anything. For instance, consider improving your customer service department, which may require only some extra training, so you can obtain word of mouth benefits. Or maybe you need better internal accounting, which again might be accomplished through training.

Sometimes, despite your best efforts, things don’t work out. In that case, you should touch base with your insolvency attorney and discuss some non-bankruptcy methods for restructuring your debt. We’ll review some of those options in Part 3 of this series.

This post is part of a series discussing options for small business owners in financial distress. In the next post, we’ll discuss non-bankruptcy methods for restructuring your debt.

Here are the other posts in this series:

• Introduction: Options for Small Business Owners in Financial Distress: A 5-Part Series
• Part 1: Your Small Business: The Economic Turbulence – Analyzing and improving your business operations
• Part 2: Accumulating Cash and Improving Your Business’ Cash Flow – Analyzing and improving the business’ flow, as well as obtaining additional financing if necessary
• Part 3: Non-Bankruptcy Ideas for Helping Your Troubled Small Business –  Ideas on using non-bankruptcy options in an effort to restructure your debts
• Part 4: Bankruptcy Options for Your Troubled Small Business – Pros and cons of various types of bankruptcy
• Part 5.1. Getting Through Chapter 11 – Part One: After Filing – Getting through a bankruptcy case and coming out on the other side
• Part 5.2: Getting Through Chapter 11 – Part Two: Plan of Reorganization – Putting together your plan for reorganization and confirmation by the bankruptcy court

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee in the Eastern District of Missouri for more than 35 years. 

(c) iqoncept www.fotosearch.com