If you are starting a business what are your biggest risks? What keeps the business owner up at night especially the business owner who is just starting a new business?
In addition to personal liability which we discussed in a previous post, one of the biggest risks the business owner faces is having enough cash. Cash is the life line of every business. Without cash you are handcuffed. You cannot pay employees, you cannot pay for inventory, you cannot pay the rent, phone bill and utilities. Simply put the flow of cash into your business is the fuel that runs the business. If there is no cash there is no business.
Through the efficient use of cash the maximum amount of income can be produced. Therefore we need to look at where cash inefficiencies can take place which essentially are the causes of cash flow problems. I wrote a Free report on solving cash flow problems which identifies 12 causes of cash flow problems and some recommended solutions.
Here is a cause of cash flow problems. Let’s talk about too much debt. I know I am not telling you anything new but debt will kill you. This is another area where the business owner is going to think it is impossible, but if the debt is killing you it is time to renegotiate your terms. The key is to have a good relationship with your bank and your banker. There is an old expression and it is “Feed your Banker”. You should be feeding your banker both literally and figuratively. You should be taking them out to lunch, but you should also constantly communicate to them about your business. Your bank needs to understand your business. They need to understand your business so when times are good they will understand your growth plan and when times are tough they will understand how you will pull through. The confidence that you have in your business should be communicated to your bank so they have confidence in your business. Every banker I speak to the number one problem they have with their clients is their clients run and hide when times get tough coupled with the fact that they do not understand the clients business. This confluence of the hiding client with not understanding the business causes panic by the banker and then the bank starts to do irrational things. They do irrational things because they simply do not know what is going on and they automatically think the worst and act in the worst way.
Communicating with your bank is a process. If you do not have such a relationship I suggest that you start creating one. In the meantime, you need to go back to your bank or lender and renegotiate your loan. In my E-Book called "Things You Should Know About Starting A business" I wrote about renegotiating your property lease and having to go to the landlord with good financial statements and good reliable numbers. That is the same approach with your bank. Have good reliable numbers ready. You need to identify the key metrics in your business and show the bank your businesses strengths and weaknesses. You have to be transparent and show the bank as much information as possible. Then you have to show your bank a forecast which will show both you and the bank how you are going to recover and be able to pay the loan on normal terms. Show your banker what expenses you are going to cut, show your banker how you are going to increase sales and margins, how you now have an inventory receipt and payment plan. Basically show your banker how you are going to generate more earnings in order to pay down debt. Areas to negotiate with your bank are interest rate reductions, increase in the number of years or interest only payments. One trade off may be offering the bank a higher interest rate, but getting interest only payments in return resulting in lower overall payments.
Work with your bank to refinance high interest credit card debt. If you have high interest credit card debt show the bank through your cash flow forecast how eliminating credit card debt will allow you to use your cash more efficiently. I don’t have to tell you what those high interest credit cards are doing to your business.
Let’s talk a little bit about stockholder debt. If there is any debt that bankers and outside investors have little regard for it is stockholder debt. Stockholders who are holders of debt instruments of a company must understand if the company they are debt holders of is failing they must be the first to make concessions. I mean total concessions including converting the debt to equity. The bank is not going to make any concessions if the very stockholders who have a stake in the company do not make major concessions.
