In a perfect world, you would accurately project your cash flows and avoid liquidity issues. In reality, even very profitable small businesses can experience a cash crunch. If you’re on the brink of a temporary cash crunch, there are a few accounts payable tactics you can use to escape it unscathed.
Identify the Cause
The first step in addressing poor cash flow is to understand the underlying cause. It could be your receivables have built up and you’re not collecting them fast enough. If your business is seasonal in nature, cash flows may dwindle for a few months. Small businesses that have a few large contracts can also experience a “feast or famine” cash flow pattern. Ideally, you’ll have a cash reserve to handle these slow months. If your reserves are low, this can cause a temporary cash gap. Run an accounts receivable aging schedule — a common feature in most accounting software — to understand what monies are owed to you and increase your collection efforts. Communicate with the customers with the largest invoices and get a commitment for a payment date.
Understand Your Commitments
Once you’ve identified the cause of your cash crunch and understand when cash inflows will increase, you may need to readjust your payment schedule to avoid liquidity issues. Carve out some time to analyze your accounts payable situation. Run an accounts payable aging schedule to generate a list of current bills, noting vendor, payment terms, payment amount, and due date. Add any routine payments that you know you’ll incur in the next month or so, like payroll and utilities. If you suspect you’ll have more invoices or bill payments coming soon, add estimated bills to the list based on recent activities.
Try to Get Late Fees Waived
A particularly bad cash crunch means you may not be able to pay all of your bills on time. Evaluate each vendor late-fee policy to help prioritize payments. Some vendors allow a one- or two-week grace period before charging a late-payment fee. For large suppliers and banks, ask if they’ll waive the late fee completely. Many major corporations and banks are happy to waive charges for good customers, especially if you alert them in advance. A quick phone call can often net you a few extra weeks or months to pay a substantial bill.
Renegotiate Payment Terms
Using the aging schedule, identify any supplier financing with short payment terms. You may have previously agreed to 10- or 30-day terms but when you have cash flow issues, you should aim for terms of 45, 60, or even 90 days. Doing so will help you better match receivable collections with incoming bills and avoid future cash flow issues. Contact vendors with unfavorable lending terms and try to negotiate a longer time frame for payment. If you’ve been a repeat customer and make sizable purchases, many vendors and suppliers are willing to extend payment terms to keep your business. If they’re hesitant to make the switch, offer the vendor something in return as an incentive. For example, you can offer to prioritize them over other suppliers and give them more of your business. They may be more likely to agree if you promise to revisit payment terms on a periodic basis.