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TheStreet Open House

Business CPR: Cash, Prospects and Revenues

NEW YORK ( TheStreet) -- It doesn't matter what your prospects are a year from now or a month from now, if you can't pay your employees and vendors today. Cash flow determines whether you stay in business or close your doors. Understanding your cash flow cycle (the amount of time it takes you to convert cash expended into cash collected) can give you significant insights into how to keep your doors open when sales are scarce and prospects are taking a long time to buy.

Recently I met with a startup with a critical cash flow crisis. At this early stage of the business, customers are few and expenditures are far exceeding the cash flowing in from sales. The company is maxed out from owner funding and credit lines, and there is no possibility of additional debt financing beyond using their established credit cards. There are several client projects in process but the advances from those projects have already been used to get the projects nearly complete. The company needs an estimated $200,000 to complete open client projects and collect the remaining funds ($250,000) due from those customers including the profit. If they can get the work done and get paid (on time and in full) they will have some breathing room to establish new goals and strategies.

The company's dilemma is that they must fund the remaining work on the projects themselves. These projects have taken longer and more resources to execute than was originally estimated. If the company is to deliver on the contracts and have any hopes of a profit, the funding has to be found, fast.

This situation is illustrative of what many company's face: There's work to be done, but due to either timing issues, poor estimates or cost overruns, the cash in and the cash out just don't match up. For established companies with proven track records in managing cash flow issues (with assets and a good credit history), additional debt would be a viable option. From a borrowing perspective, the cash flow issue is purely timing (at this point). There are revenues, cash coming in that could be used to repay the debt, but this company is a small startup with shaky financial history. It verges on becoming not just technically bankrupt (cash needed for current obligations is less than cash balance or projected cash for next 60 days) but actually bankrupt when creditors demand payment and force bankruptcy filing.

What are the options for this business to make it through the cash crisis?

The first option is to devote more of the current resources to getting the projects done, if they can move from using 40% of their resources to 90% of their resources on a project they can finish in six weeks instead of ten weeks. They are already paying for these resources so using them to finish the project makes sense.

Secondly, they need to begin communicating with existing vendors to see if terms can be extended or payments reduced. If they can get payment terms extended from 30 to 60 or even 90 days, then cash on hand can be used to meet payroll and finish the projects.

The third thing that must be done is that all unnecessary expenses, no matter how small, need to be curtailed. For example, unavoidable travel must be tightly controlled, by moving from four-star hotels and direct flights to three-star hotels, shared rooms for those traveling, and flights on lower-cost airlines. Planning travel and booking in advance online will also have an impact. Activities that are not about cash, prospects or revenues, need to be minimized. This change in operational focus for the short term may also require temporary layoffs of staff and/or permanent staffing reductions.

If you have reached a point where cash is non-existent and the next inflow is scheduled far beyond when you need to make your next payments, then your options are tougher and more limited. Your cash position -- how much money you have to meet your bills today -- determines if you'll be able to stay in business.

Many business owners and managers have learned the hard way that denial and hope are not effective strategies. You must manage your cash, especially when in start-up mode or during tough economic times. The earlier you can recognize an upcoming cash flow issue, the more options you have to prevent or mitigate it. If you have cash flow issues, you have to be focused on managing the inflows and outflows closely on a daily basis. Too many organizations wait until the crisis is upon them and they have already hit the iceberg.

--By Lea Strickland

Lea Strickland, M.B.A., is the founder of Technovation Entrepreneur, a program that helps entrepreneurs turn their ideas into businesses. Strickland is the author of "Out of the Cubicle and Into Business" and "One Great Idea!" She has more than 20 years of experience in operational leadership in Fortune 500 and Global 100 companies, including Ford, Solectron and Newell.

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