Small businesses are in my blood. I come from a family of small-business owners and have started a few myself. So I know the small-business owner’s number one concern is having consistent cash flow to cover not only operating costs but the countless unanticipated expenses that are guaranteed to come along. Business owners often learn these lessons the hard way, but in tough economic times, like when you're faced with high inflation that you didn't plan for, you can get yourself into a pretty big hole. I’ve heard it said that money solves all problems in business and that it's not a real problem if you can throw money at it. There’s another angle, too: if you don’t have the money to throw, then you’ve got problems. So how can you prepare for fluctuations in cash flow? Plan Ahead Planning ahead might seem obvious, but as important as it is, it’s often overlooked by small-business owners who can understandably be more focused on the day-to-day concerns of running a business than on thinking through the big picture. But that’s exactly what can come back to bite you. Ideally, you have a cushion set aside to cover your operating costs during a slow down or for when you’re hit with surprise expenses. Having three months’ operating costs on hand would give you some peace of mind, but with six, you’d be well positioned to deal with natural ups and downs, as well as a big challenge like Covid or inflation that comes along. Of course, some of those unexpected occurrences might be positive too–an opportunity for growth, for example, which if you don’t have the capital to take advantage of, might pass you by. Granted, what’s ideal and what’s realistic is often not the same. If you’re getting by month to month, then it’s extra important that you keep a close eye on your cash flow. If you’re not paying attention to the arteries of your business – costs and income – by the time you realize you have a problem, it will be too late to do anything about it because you’ll be out of cash. What Could Go Wrong? If you start seeing your costs going up or your business not performing as well as you expected, it might be time to start taking action so you’re prepared for the worst. For instance, a colleague of mine in the pool construction business likes to stock up on the white cement used in pools when the price is low. So when supply chain issues made this cement hard to come by, he was not only prepared, but he actually made additional profit by marking up materials costs based on the current, higher rate. However, unforeseeable expenses will come up too. Count on it. In one of my businesses, I was greeted one day by an auditor from the tax commission who wanted to inventory my office property. At the time, I had no idea I had to pay property tax on my office chairs. Any number of things can go wrong, and for small businesses, little problems can have big impacts. Here are just a few of the problems that can affect your business: Employee costs – Inflation, increases in minimum wage and government subsidies have made it difficult to retain and hire low-skilled workers. Unanticipated employee difficulties – e.g., health issues Increase in rent Supply chain shortages (restaurants, construction, appliances) Quickly changing trends in retail Increased competition Even things going right can bring added challenges that you have to be aware of. The bigger you grow, the more your expenses. When I started my law firm, our monthly expenses aside from payroll totaled $5,000. By the end of the firm, that number had jumped to $50,000. As we hired more people and took on more clients, that meant a lot more supplies and new, bigger office space. Which brings us to the big problems. Inflation And Other Big Problems So you missed the red flags, you don’t have a comfortable amount of operating capital set aside, and you’ve just been hit by a big challenge. Now you’re in a hole. What should you do? How you react at this point is crucial. If you can make it over the initial big wave, you stand a chance of righting the ship. Cut expenses. You’re in triage mode now. The first, most important thing is to stop the bleeding. And the most effective way to start is, sorry to say, to not pay yourself. It goes without saying that you have to take care of your employees if you want to keep them. But you also have to honor your other commitments: pay your suppliers, subcontractors, and anyone else you rely on to keep your business running. As the owner of the business, you stand to benefit the most from its success, but that also means making the biggest sacrifices. If not paying yourself just isn’t an option, don’t despair–there are other options: Borrow. Sometimes just cutting expenses isn’t enough–you need a cash infusion. In that case, the best place to start is with a business credit card or a line of credit that isn’t personally guaranteed. This can give you enough cash to weather the storm, and if your business does go under, you’ll at least live to fight another day. There are situations where you might also want to take out a line of credit or a loan. If you do, however, make sure that you stay in good standing. You do not want to be held personally liable if your business doesn’t recover. If that looks like a possibility, it’s unfortunately probably time to throw in the towel. The Light At The End Of The Tunnel Often this two-pronged approach will get you over that critical first hump and allow you to put your business back on track, hopefully with greater insight into the areas of your business that call for greater planning. But taking on strategic debt isn’t just for moments of crisis. Having flexible operating capital is part of being able to maintain a steady cash flow in and out of your business. And that’s the name of the game. There’s a critical aspect of healthy cash flow, and that is reputation. When I was first starting my pool business, my uncle gave me a great piece of advice. He said to always pay my subcontractors immediately so that they would know I was a dependable partner. One of the challenges small businesses have faced with supply chain shortages is that suppliers give first priority to their biggest customers, the ones they can rely on to be around to do business with in the future. You might not be the biggest business around, but you can still be reliable–for your suppliers, partners, employees and customers. Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.