Eight Ways to Avoid a Cash Crunch

Just about everyone is facing a cash crunch, and that can mean a big blow to a small business's bottom line.

There are a variety of reasons why small firms face tight funds, but the frontrunner today is a precipitous drop in revenue, thanks to the ailing economy, according to Bob Greenfest, a principal at accounting firm Santos, Postal & Co. in Rockville, Md., as people tighten their spending.

"Even the most prudent businesses that have operated in a conservative manner are having a drop in sales," says Greenfest, who helps small businesses work out financial problems.

But one of the best ways to remedy such a drop is to build a relationship with your community, says Thomas Swartwood, an investment banker and entrepreneurship professor in Des Moines, Iowa.

Here are the other big culprits that often lead to a cash crunch:

1. Undercapitalization: If a once-profitable firm passed those profits on to the owners, but didn't leave a cushion for lean times, they're not going to have enough capital. Plan for down times.

2. Allowing expenses to drive revenue: Many companies justify expenses as a way to generate future revenue, but then find themselves in the red. "Some businesses will argue that they just have to have this new piece of equipment because it will get us new business or they just have to lease a new office space," says Greenfest. While those reasons may be true, be wary of getting into debt without a surefire way to recoup those costs.