What Do I Do if my Business Runs Out of Cash?

First, take a deep breath. Exhale. Do it again. Count 6 things in the room around you: computer, a glass of water, my bookkeeper looking panicked…

Once you have achieved a calm headspace, take a survey of your cash position: 

1. How much cash is left? 
2. Is it enough to cover payroll? If no…
3. When is the next payroll due? 

If you answered “no” to #2, you need to scramble to get cash in time for #3. The fast options to get business cash are:

• Collecting from customers
• Owner cash infusion or loan
• Borrowing from a subprime lender, like 
  • an asset-based lender (ABL) or 
  • merchant cash advance lender (MCA)

Each of these options has negative ramifications – bad customer experience, personal financial strain, and high-interest rates, respectively speaking. So pick your poison, accept the pain, and move on.

Once you’ve solved the immediate need then stop, take another deep breath, and reflect on how you got to such a tight place with some strategic analysis.

How Can a Profitable Business Run Out of Cash?

Those who have taken accounting courses in MBA school remember that profit is not the same as cash. For those that haven’t or those that want a refresher, here’s a list of common business situations that cause cash constraints on an otherwise profitable company:

• Rapid growth
• Customers not paying invoices
• Purchase of fixed assets like machines, vehicles, real estate, or capitalized software
• Purchases of large amounts of inventory
• Old aging inventory
• Significant debt service
• Sudden payment of unaccrued tax, bonus, or commission liabilities (this is a common bookkeeping and forecasting error for small businesses.)

There can be other reasons but those are the most common, and it’s usually a combination of a few factors. For example, a rapidly growing business is often purchasing lots of inventory, investing in fixed assets, and not managing their accounts receivable. 

If your business model is profitable but you’ve mismanaged one of the above categories, you need to build a 13-week cash forecast to manage your short-term crisis. This is like taking a magnifying glass to each cash flow in and out and ensuring week-to-week survival. Maintaining a 13-week cash forecast is time-intensive but essential to avoiding critical errors when cash is tight.

If the situation is dire, you may also consider recapitalizing the business through a debt refinancing or by selling equity. Talk to a turnaround professional to assess if this is feasible and what a fair deal would be.

How do I Turnaround an Unprofitable Business?

Turning an unprofitable business around is more challenging than saving a profitable business that mismanaged cash. You’ll need to step out of your day-to-day firefighting to strategically analyze the business. See if you and your finance staff can answer these questions:

• When did my business become unprofitable, and what caused the change?
• What are my gross profit and gross margin by product/service?
• What are my top 3 costs?
• What are my top 5 expenses as a percentage of sales?

So long as you have good gross margins (double-check how you calculate this – small businesses often do not allocate costs correctly) then you can usually grow your way out of a cash crisis… on paper anyway. If growth were that simple, you probably wouldn’t have ended up in a cash crisis to begin with. It’s more likely your solution will be growth paired with some of the following tools:

• Reduce excess headcount and expenses. Good targets include:
  • Underperforming sales agents
  • Research and development
  • Administration
  • Underutilized equipment, real estate, vehicles, etc.
• Cut slim-margin or low volume products and services. This is done to eliminate administrative complexity, focus sales strategy, and reduce inventory.
• Focus on operating efficiencies. Challenge your teams to do more with less. The ROI on cost savings is more compelling in a downturn, whereas the ROI on sales is more compelling during a growth cycle.
• Insource or outsource processes. At a smaller size, you may not be able to afford a fulltime admin, office space, accountant or sales rep. Conversely, you may be able to save money by bringing in marketing, bookkeeping, or warehousing.

The right move for your business will be specific to your situation. Sometimes it’s important to make your management team part of these strategic decisions. Other times it’s necessary to remove their influence from your thinking. A turnaround professional can help you manage either situation to break the stale thinking that stagnated the business.

What if my Startup Runs Out of Cash?

Startups have unique cash challenges due to their raise-burn-raise-burn cycle. Sometimes a downturn hits right in the middle of a capital raise, causing an instant cash crisis. Other times a downturn hits months before the runway ends. To manage the unique challenges of a startup running out of cash, follow these steps:

1. Know what levers you can pull to add runway. Startups in rapid growth mode are not cash-efficient, but simple business changes can add weeks or months of runway. Examples include:
   1. Max out credit cards
   2. Delay vendor payments
   3. Halt inventory orders
   4. Stop founder salaries
   5. Furlough non-essential employees
2. Don’t think twice, take the deal. During the good times, founders may shop around for the best terms on a financing round. If the capital markets tighten up, don’t look a gift horse in the mouth: take the deal you have. Delaying even a day can cause the money to come off the table.
3. Pare back your growth ambitions. Startups burn through cash due to their rapid growth cycles. Your startup may be cash flow positive if you slow down your approach to growth. Run a few pro forma models to see if that is feasible for your business.
4. Consult your investors. Some investors may want to save your business with additional capital or bridge loans. If the company goes bankrupt they lose their investment, so a capital infusion is often a win-win. But be prepared to give up some control in exchange for the funding.

What do I do if my Small Business Runs out of Cash During a Turnaround?

If your small business runs completely out of cash, go back to the beginning of this article and start over: breath, calm down, then assess your resources. A turnaround is hard work that cycles between short-term panics and long-term pivots. Ask yourself how hard you want to work to save the business. At some point, the effort isn’t worthwhile and you’ll just sell whatever is left. Just as for help as soon as possible before there is nothing left to save.