It’s the old run-out-of-money before you run-out-of-month problem. We’ve all experienced a cash flow shortage in the course of owning a trucking operation. In fact, from time to time, a lot of business owners find they do not have the cash on hand to cover accounts payable. There’s always that sudden slowdown in freight, an abrupt increase in fuel costs, or that engine in-frame or transmission repair that wasn’t anticipated. The causes of cash shortages are as diverse and numerous as small trucking companies.
So what’s the best means to handle these cash flow deficiencies? It’s good to have several different strategies in place. Try the following suggestions:
- Have a setback reserve in which you place a specific percentage of all incoming revenue aside to cover slow times, repairs or spikes in fuel.
- Have a capitalization plan in place; set aside and save profits until you’ve reached a balance equal to 18 months of your fixed expenses.
- Have a draw loan available through your bank or financial institution specifically designated to cover times when accounts receivable aren’t keeping pace with accounts payable.
- Contract with a factoring company to either purchase your shipping invoices through a non-recourse contract or provide upfront cash on shipping invoices while in a recourse contract, so you receive your revenue immediately upon the delivery of each load.
With all the planning, different saving and set-aside programs, and factoring, there still might be a time when the cash well is dry and a vendor or creditor will be asking to be paid. What are your options at this point?
Well, you need to anticipate that there may be potential problems paying certain bills, and this should be long before you open the checkbook and see a zero balance.
EMERGENCY 'LACK OF CASH' PLAN
It’s of the utmost importance that you prioritize which bills absolutely must be paid to keep your operation running smoothly, i.e., items such as fuel, insurance, utilities, rent, and payroll. As you develop your emergency plan, make sure you’ve covered all of the critical needs that keep your trucks rolling with paying freight. These are the accounts payable you should be paying with revenue, your reserve account, or the draw loan previously discussed.
If not making a payment would in any way jeopardize your ability to haul freight and generate revenue, then it must be paid first. List the most critical down to the least critical of these items and pay them in that order.
Now, when you anticipate being short of cash to pay bills—and the operative word here is anticipate—don’t wait until you see the checking account balance. If you suspect you may be short on cash, call your creditors and vendors. This is the time for full disclosure. Explain the situation and tell each one what your game plan is for paying them—whether it will be a partial payment, an interest-only payment, or a delay in payment altogether. Explain why they’re being asked to wait: a steep reduction in freight revenue, an unexpected large repair bill, or other reasons that are even more specific to your operation.
Notifying your creditors as soon as you are aware of a potential problem signals to them that you know you owe them money, that you’re not going to ignore them, and that you’re asking them to work with you so they are paid in full.
Because you are staying on top of your accounts payable, the creditor may be more willing to work with you.
Be proactive and stay ahead of creditors calling you to demand payment. Giving the creditor a heads-up about your situation before any type of payment is due gives both you and the creditor time to develop a beneficial strategy to get you back on track.
Unfortunately, banks and other lending institutions have specific regulations and procedures to which they must adhere. Many of those regulations that deal with missed or late payments leave them few options to help you with your situation; however, given a 30-day or even 15-day notice prior to the due date offers them more flexibility in crafting solutions for your situation.
Many small businesses will experience a short-cash month or months in the normal course of doing business. Obviously, setting back funds when income revenue is flowing well is the first defense to not missing any payments to creditors. But in the best-laid plans, there will be that time when the setbacks don’t match the outgo, and that’s when becoming proactive and communicating with your creditors becomes critical to the survival of your business.
That phone call may be the most important call you make to keep the wheels rolling and your trucking company in business.