running out of cash? communicate with your vendors

It happens to every small company at least once (if not many times): you are low on cash and can’t pay your bills as they come in and the phone is ringing. Why can’t you pay? There are lots of reasons: waiting on receivables, pending financing is taking longer then expected, and of course, the obvious, you are not closing any business. For this posting, let’s assume it is one of the first two (not closing business is a much more serious discussion).

Typically what small companies due is stop communication with vendors (e.g. don’t pick up the phone, don’t respond to email queries, etc.). Yes, it is embarrassing that you can’t pay your bills and it makes people uncomfortable but not communicating is the worst thing you can do. This is the time for a little vendor management to get you through the difficult patch and build strong relationships going forward …

• Look at your accounts payable list, daily, and prioritize who should get paid when. Employees, tax, health benefits, rent … care and feeding of staff always comes first. Then pay small vendors (e.g. the mom and pop shops) before large institutions (your lawyers and auditors can wait a few months).
• Do a cash projection daily based on what you think is going to come in and the prioritized payments above - this will allow you to set better expectations.
• Don’t be afraid to share your priorities with a vendor: call them, tell them you have a ‘financing closing shortly’, and would like to set up terms to pay them back (e.g. a third in 30 days, and the remainder when the financing closes).
• Let them know you will continue to share information with them as it arises that way they too can plan accordingly.
• Correctly set expectation (don’t say you will pay when you know you can’t for atleast a few months).
• If the financing or receivables takes too long, consider making a ‘courtesy payment’ to thank them for patiently waiting. The courtesy payment doesn’t have to be meaningful (say 10% or less) it is just a gesture so that they get something.
• Find a way to build a relationship: by communicating and correctly setting expectation when this happens again (and it will) they are more willing to work with you for payment vs. calling a collections agency.
• See the other side: you are strapped for cash and waiting for payment. Well, because you are not paying your vendors they are going through the same thing. As mentioned above, try to pay the ‘little guy’ first.
• Don’t take on extra expenses when you know you can’t pay the ones you’ve got!! Keep the executive management team constantly up to date on cash and payments so that they can act accordingly.

Yes, you will have vendors that will freak that you haven’t paid, are not interested in payment terms or communicating - they just want their money. In those cases remain calm, take the high road. They can either work with you or be difficult. Either way it won’t speed up their payment - it’s like getting blood from a stone.

Of course, the best scenario is that your cash management skills are strong and you didn’t get into this mess in the first place. But, hey, we all know that that really big deal that was supposed to pay in Net 30 isn’t paying … which screws up your cash projections. Time to collect.

Good luck!