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How to Avoid a Cash Flow Crisis 

Think of cash flow as the oxygen for your business. Without cash, your business will suffocate. Payments to yourself, employees and vendors can be put at risk when you haven’t been paid by a client.

And here’s something that small business owners don’t often think about: Your business can suffer huge financial stress after making a big sale.

Are you confused? I’ll walk you through an example.

Let’s pretend you’re a small business owner who sells t-shirts. You just got a big order from a big box store and you and your staff are over-the-moon excited. What you didn’t think about is that you will need to make and ship the t-shirts, so you will have to pay vendors for the shirts, the printing, the packaging, and the shipping—but you’ll probably wait 90 days for payment from the big box store.

In the meantime, your employees, landlord, electric company, and more will all expect to be paid on time. Sometimes a big order can almost put your business out of business!

I recommend that small business owners practice “cash flow yoga.” What I mean is that they work hard to bring cash in as quickly as possible (inhale quickly), and exhale (spend money) as slowly as possible.

There are strategies you can use to manage your cash flow more effectively. Let’s walk through five examples of what small business owners can do to minimize cash flow disruptions.

1. Arrange for some upfront payment. This is a solid strategy, and one that works especially well for service providers. It’s a good practice to insist on an upfront payment of 20 percent or more before you commence work. I also would recommend including milestones on longer projects that when reached, trigger additional payments, with a final payment triggered upon acceptance of the deliverable.

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For products, this also might be a percentage of the total value of the sale. Make sure it is enough to cover your investment in materials and labor. And remember that you’ll still have your usual overhead costs to pay as well.

2.  Negotiate flexible terms with your vendors. Your vendors are partners in your business. If you build strong relationships with them, you can sometimes get some investment from them in the form of flexible payment terms. If a vendor understands the importance for your (and consequently their) business, they may be happy to give you extra time to pay.

3. Apply for a line of credit to cover the gap, if needed. There are times when applying for a loan, or having a line of credit with a bank or other lender makes sense. Depending on the amount of cash needed, it may even make sense to temporarily leave a balance on a credit card. Just beware that credit card interest rates can be significantly higher than other options. But if you are certain you can pay the balance off in 30 to 60 days, this can be a short-term option.

4. Offer your customer a discount if they pay earlier than their standard terms. Generally, the bigger the company, the longer they will take to pay. If smaller companies agree to 15- to 30-day terms, larger companies may insist on 60 to 90 day terms. If an invoice gets lost or if for whatever reason your business gets paid late, you can encounter some big problems. If possible, offer large customers an incentive for paying early—even if your profit margin is less. You’ll sleep better. Trust me.

5.  Consider factoring. Depending on the type of business and the size of the order, you might want to look into factoring. This is when you sell your receivables to another company and they pay you 70 percent to 90 percent of the value of those receivables. The benefit is that you get the money now, and the factoring company takes the risk of late or non-payment.

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The good news for newer companies who may not have an established credit rating is that the factoring company primarily cares about the creditworthiness of the company buying your products. So if it’s a big box store, you’ll get a more favorable payout.

As you can see, there are several ways that you can protect yourself and your company. The tactic that’s right for you will vary depending on your type of business and financial situation. But it’s always good to know your options. As I often say, “If you fail to plan, plan to fail.”

Follow Carol Roth on Twitter @caroljsroth.

Carol Roth
Carol Roth
Carol Roth makes people think, makes them laugh and makes them money. She is a national media personality (currently an on-air contributor for CNBC), 'recovering' investment banker, entrepreneur, investor, speaker and New York Times bestselling author of “The Entrepreneur Equation.” As a deal-maker, Carol has helped clients complete more than $2 billion in transactions, including capital raising, M&A, licensing and partnership deals, plus create 7-figure brand loyalty programs. Carol acts as a brand spokesperson and advisor for a variety of companies, is a huge professional sports fan and has an action figure made in her own likeness.

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