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Saturday, May 09, 2009

The cash flow challenge

Perhaps the recession is lifting. But many businesses will still die because they have failed to manage their cash flow challenges. This is especially the case if you have long lead times between getting work and payment or (worse) some of your clients are going down the tubes.

Business failure can be like a domino effect: Suddenly, even though you should be okay, you are not, because your money has dried up.

The natural first line of defence is to cut unnecessary expenses; then you start cutting people, borrowing, stretching your lines of credit, and then . . . just before things are about to fail, you decide to take a last ditch at advertising. After all, maybe some business will come in, and if all goes wrong, does it really matter. The media outlets often don't demand payment in advance will just sit in a pile of creditors if you file for Chapter 11 or close shop altogether.

(The latter sort of behaviour of course doesn't help my business one bit, but a wise marketing teacher within our industry taught us: Take virtually every bit of business you can get -- and then go to work on collecting aggressively. The reason: It doesn't costs us much incrementally to accept an additional ad, just a little administration and processing and sales cost, since we are publishing anyways. We might have a 50/50 chance of being paid if the ad runs, but that is real cash in the bank. If we decline credit, we get zero. However this approach undoubtedly does not apply to most contractors, suppliers and professional services within the AEC community!)

Is there a better way?

Well, if your business is well run, you will be a solid marketer in good times as well as bad -- and the really successful marketers have the cash reserves to increase their advertising in hard times (and media outlets, as you can see above, aren't too worried about your credit lines when this happens.)

Unfortunately, last ditch advertising rarely works -- if the problems are so serious you are about to close your doors, a burst of ads won't solve anything, except to add to your creditors' list.

So a better strategy, one that may seem counter intuitive is this:

  • Cut your discretionary and wasteful "nice to do expenses".
  • Cut any staff who are unproductive and not contributing to your business.
  • Spend plenty of time with your existing customers; mine them for repeat and referral business, and most importantly, observe the media they are listening to, using, and following.
  • Spend time and energy (but not much money) improving your website and Internet communications.
  • Take a big breath and begin advertising, consistently, in the media your clients use. (This is NOT a time to take a big risk on untried new markets; it is a time to build on your existing demographic and client base.)
Suggested marketing spend is about 5 per cent of your overall projected revenue. Find that money, somehow, even if it means cutting things you enjoy but don't really help your business.

If you don't, six months down the line, you indeed will have real cash flow and business survival challenges.

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