How to Prioritize Who Gets Paid When Cash Flow is Tight

9 Tips to Navigate a Cash Flow Crunch

When a business is short of cash, paying the bills can become a significant headache. Then, the final demand letters begin to mount up, and every phone call seems to be an angry vendor demanding payment.

It would be nice to be able to pay every bill on time or before the due date. But most businesses will face cash flow shortages at some point. However, if you have not had to work with a limited amount of cash before, juggling payments can be stressful.

The main thing in a cash flow crisis is to remain calm and not panic. The second rule of cash flow management is do not to pay bills based merely on who shouts first and who shouts the loudest. Instead, it’s best to start with a list of accounts that need paying in order of priority. The third rule is do not ignore the problem that caused it, because it won’t go away on its own.

In some cases, you will be able to negotiate with creditors. Most people will be accommodating, so long as you keep them informed. However, some creditors will be less understanding, and some will be more essential to your business than others. So, here are tips on how to prioritize which bills to pay when cash is tight.

1. Update Your Cash Flow Forecast

When you face a significant lack of funds, managing the cash flow will be a priority. So, your cash flow forecast will need to be entirely up to date and as accurate as you can make it. Revisiting the forecast at the end of each month is not going to be enough. You will probably need to update your spreadsheet every day. Having an up-to-date cash position in front of you will help you make better decisions and prevent you from making hasty promises you can’t keep.

2. Keep Your Creditors List Updated

Cash flow crises do not usually resolve themselves overnight. So, you will need to be on top of what you owe to whom until the cash position has improved. It will help if you keep your list of creditors up to date, and keep a note of any correspondence or conversations with your creditors.

3. Taxes Come First

The Internal Revenue Service and other government bodies have the powers to impose penalties and fines on your business and ultimately shut down your company. Consequently, federal, state, and local taxes should be among the first on your payment list. However, in some circumstances, you can negotiate with the IRS for an extension or payment plan for taxes owed. Still, you must be confident that you can pay within the agreed timeframe as the IRS imposes stiff penalties for late payments.

4. Take Care of Employees

The next item on your must-pay list is the payroll because, without workers, you will have no business. If you are struggling to pay the salaries every month, you might need to lay off some workers and restructure your business. There is, of course, also a moral obligation to pay the payroll because your workers have families to feed and bills to pay.

5. Consider Operational Importance

Once you have the IRS and payroll in hand, you are into cash flow juggling territory. Now you need to consider what impact not paying the bills will have on the operation of your business. Quite simply, if your business cannot operate without a service or supply, that vendor should come first. But, you will also have to consider the likelihood of each of the unpaid vendors taking further action if you do not pay them.

6. Rent and Utilities

If you operate a brick-and-mortar business, rent and utilities must be high up on your list of creditors to be paid. You can’t open a store without lighting, and you can’t run a manufacturing facility with no power. And, of course, if you fall behind paying your commercial lease, you could find yourself receiving a notice to vacate the premises. However, removing a tenant and finding a new occupier can be time-consuming and expensive. So, you may be able to negotiate an extension or an arrears repayment plan with a landlord, especially if you have a previously good rent payment track record.

7. Secured Debt

Failure to make payments on secured loans of lease agreements could result in the seizure of assets. Should those assets be critical to the operation of your business, their loss could hinder your ability to continue trading. However, the loss of some assets might be merely an inconvenience. So, you will need to prioritize the payment of secured debts based on the potential impact on the operation of the business. You may also need to consider your personal finances if any of the obligations are secured by a personal guarantee.

8. Significantly Overdue Creditors

When debts are passed to collection agencies, it could affect your company’s credit score and result in legal action. So, once you have considered the above, you will need to assess the likelihood of outstanding accounts being passed to collection agencies. Debts that are 60 days or more overdue are likely to be moved onto the collection phase. So, these accounts must become a priority for payment or negotiation.

9. Lower Priority Creditors

It is best to try to pay all bills before non-payment becomes a significant issue. However, the late or non-payment of some bills poses less of a risk to your business than others. For example, failing to pay non-secured loans and credit cards on time will likely result in penalty charges and additional interest. However, there will be no imminent danger of any assets being seized. Other bills like subscriptions and minor services can be low on your priority list, too. There are also things like insurance, which will be canceled if you fail to pay the premiums but which can be replaced when the cash becomes available.

The Bottom Line

Dealing with a cash flow shortage can be incredibly stressful. But if you have a plan and you prioritize payments, the situation will be more manageable. So, get the IRS and the payroll paid first. And then prioritize further creditor payments based on the considerations mentioned above. And, most importantly, don’t ignore the situation. You will need to manage the immediate cash flow crisis and then restructure the business to avoid the same thing happening again.

About Universal Funding

Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.