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?