Stuff Happens: Your Company’s Emergency Cash Plan

Stuff happens.

That “stuff” is sometimes called an “emergency.”

For example, you’re forced to replace expensive machinery with little notice…and it will cost close to $10,000.

Or a large account suddenly files for bankruptcy protection, putting your accounts receivables in jeopardy…meaning $30,000 in payments will be seriously delayed, or maybe never received at all.

But, to be fair, good stuff happens, too. That’s called an opportunity.

Your company is called off the “wait list” for a plum spot at an important trade show…but you’ll need $15,000 to pull it off.

Or you’re offered an exclusive distribution arrangement for critical replacement parts in a growing industry…but the manufacturer needs you to pony up $50,000 – in 30 days, take it or leave it – to acquire enough inventory to cover the territory.

But whether the surprise is bad or good, having enough money on hand to either ride out the storm or cash in on the good fortune is critical. That’s not always the case when you’re running and growing a business, but here are some ideas for preparing for – and surviving – cash flow emergencies.

Emergency Cash Plan: Build a Reserve

As soon as your company is able, you need to establish an emergency cash plan and rainy day fund. If you don’t, you’ll probably at some point, when business gets a little soft, end up taking on more debt, miss payments to vendors or suppliers (or tax authorities), and lose out on attractive opportunities.

Like any savings program, it’s tough to get started. But if you make it part of your budget and consider it a non-negotiable expense it gets easier.

Remember, this is emergency money that you need to be able to count on being there when you need it most. So where should it go? A competent financial advisor can steer you in the right direction, but in general think about parking the money in short-term CDs, high-quality commercial paper, or money market funds. Think “low risk, high liquidity.” You won’t earn a lot of interest on these funds, but that’s not the point.

How much do you need in your emergency fund? One rule of thumb is three months of operating expenses. But again, work with your advisor or accountant. The more stable your company’s cash flow, the less you probably need to set aside. But if you’re in a seasonal business, or one that’s especially vulnerable to the ups and downs of the economy and business cycles, consider stashing more away during the good times to make sure the lights stay on when things slow down.

Lines of Credit

If you have access to a bank line of credit, tapping it during an emergency is better than letting a cash crunch hurt your company’s performance. You’ll add to your debt load but, if you stay committed to paying it off as early as possible, the long-term impact on your cash flow can be minimal. And again, it beats missing payroll, not paying a critical supplier, or stiffing the IRS.

Lines vary in terms of the amount of credit offered, fees and interest rates charged, and terms of repayment. They can be expensive, so it pays to shop around.

But be warned: Lines of credit take time to establish and – you already know this – the worst time to go looking for a credit line is when you actually need the money, so plan ahead.

Alternative Financing

Other business funding tools can help your company survive an emergency and/or be part of your normal cash flow planning and management. Different options are more suitable for certain businesses or situations, but they’re all valuable, flexible alternative financing mechanisms.

Invoice Factoring

Invoice factoring lets you sell your company’s receivables to a third-party for fast payment – usually the same business day.

Invoice factoring can dramatically improve your company’s cash flow – instead of waiting 30, 45 or even 90 days for payment, funds can be wired to your account almost immediately. Individual transactions are processed quickly, but make sure you allow time to set up an arrangement with your factoring company.

Purchase Order Financing

In a purchase order financing arrangement, your company is paid an advance on purchase orders issued to you by your customers. Your customer’s payment history and credit rating, rather than yours, is what determines the terms of the transaction.

Purchase order financing is particularly attractive for companies that need cash fast to acquire supplies and materials needed to fill a confirmed order from a stable customer.

Inventory Financing

With inventory financing, your company’s current inventory – products and materials that you intend to sell – is used as collateral against funds advanced to you against the future sales of that inventory.

The amount advanced is a percentage of the expected sales of the inventory. Again, this can be used as a short-term solution to an immediate problem, or a regular part of an ongoing cash flow management plan.

Think Outside the Box for Your Alternative Financing

As the expression goes, there are a lot of ways to skin a cat. Often, two or more alternative financing tools can be combined to ensure a company secures the funding it needs to get out of a cash squeeze or just operate more effectively.

Do your homework and ask your lender or broker a lot of questions to make sure you understand your options.

 

Does your company need to get a cash flow management plan together? MP Star Financial provides invoice factoring, purchase order financing, inventory financing and other alternative and asset-based lending services. Call to discuss your options with a no obligation consultation. (800) 833-3765, extension 150.

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