The Impending Cash Crunch

Over the last two years, the government has thrown money at small businesses with the Paycheck Protection Plan (PPP), Economic Injury Disaster Loan (EIDL), and Employee Retention Tax Credit (ERTC). Yes, there have been other credits, loans, and payment delays. But, as the government cash dries up, inflation increases and loan payments and social security taxes have to be paid, small businesses could be in for a rough time. 

Early Warning Signs

Not all businesses will have challenges, and some will grow. However, here are some signs you may have challenges ahead with cash flow:

1. You have spent all PPP, EIDL, and ERTC money 

You are probably running at an operating loss if you have spent everything, not including this funding. If that is the case, you may simply be spending much more than your income but don't have more government funding to band-aid the issue. I support businesses getting as much cash as possible. Still, there needs to be a plan to invest this cash for a positive return on investment. Otherwise, the money just gets spent, and you are left wondering what happened.

2. You don't have a financial forecast or cash flow plan

If you don't have a financial forecast or cash flow plan for at least the next 12 months, then you aren't alone. We also know that small business failure is relatively high. Some statistics show that 50% of businesses fail the first five years and only 30% last ten years. The lack of a strategic and supporting financial plan is one reason for business failure. Due to COVID, businesses have failed even with all the cash thrown at them. The cash was beneficial, but many businesses used this to survive. Many of them didn't properly plan or invest the money well. I also believe that the extra cash covered over financial problems will come to light in the coming year. Therefore, poor financial planning and cash flow forecasting could lead to more business failure at a higher percentage.

3. No Regular Review and Adjustment to Financial Plan

Business and financial forecasts change regularly. I know business owners and leaders who don't want to forecast because it seems to be a waste of time and is always wrong. However, an accurate forecast doesn't mean you don't make assumptions to see how it works out. If a financial plan does not work out on "paper" or my favorite tool (Microsoft Excel), it won't work out in real life. The first step is to develop a forecast that works and communicate this to key leaders. Then, it is essential to review the financials monthly and make changes to the forecast. If you are in a cash crunch, a weekly cash flow forecast is helpful to review weekly to make sure you are in good shape in the coming weeks. 

In some cases, businesses did not spend all the cash received from the government and might feel "comfortable ." However, are you slowly using this cash, and it will eventually run out? Just because you have money now does not mean you are truly profitable and sustainable. More challenges will come that will make it harder to do business. 

Do any of the above warning signs apply to you? COVID variants, supply chain issues, and inflation are known, but there could be something unknown. Why not have a plan in place to see where you are headed? Not only will you have more peace of mind, but you will be more prepared to weather the impending cash crunch that will most likely come. 

Call to Action

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Shane Bender

My experience as an Auditor, Controller, Director of Financial Planning & Analysis, and VP of Finance in small, medium, and large businesses over the last 15+ years has given me a unique level of knowledge between accounting and finance. My focus is helping small-to-medium-sized organizations grow by providing them with key information, creating scalable processes, and implementing solutions that will help them grow to the next level.​