Some very smart ways to avoid a cash crunch.

By Steve Strauss, USA TODAY Small Business Columnist

Writing a question-and-answer small business column as I do every week for USA TODAY, I necessarily hear from a lot of entrepreneurs. They share their triumphs and tips with me and I share my ideas and insights with them.

It’s interesting to note how much my tips have changed over the years. A decade ago, I was still telling entrepreneurs that they had to have a website (you have one, right?), but these days much of what I discuss is social media marketing – how to do it and how do to it right.

Maybe even more interesting than what has changed is what has stayed the same. Questions and concerns still revolve quite a bit around money. Typically, questions of this ilk are with regard to how and where to find startup capital, what the best ways to fund the growth of a business are, and how to invest profit once it becomes steady and reliable.

Additionally, people often ask me about the most common problem I see. Hands down, it has to be the dreaded “cash crunch”: How to avoid one and what to do if you encounter one.

It’s not a surprising issue really if you think about it. People start businesses for all sorts of reasons. It could be they hated their boss or they had a big idea. It might be because they are passionate about a project or that they just wanted more freedom. But whatever the case and whatever the reason, it is also true that new small business owners don’t usually have much training in cash management, budgeting, or small business accounting. The result being that they too often find themselves in financial hot water.

The cash crunch is the most common culprit. Either the business is seasonal and the owner didn’t prepare for the lull, or a big customer went elsewhere, or some other – usually foreseeable – event occurred that caused a temporary disruption in the steady flow of income. Whatever the case, a cash crunch is a bad thing.

So let’s avoid that. Here are some savvy ways:

First, you can create multiple profit centers. This is one of the first lessons I learned when I opened my very first business, my law firm (I don’t practice anymore, thank you very much.) I started out doing wills and trusts and made a profit my very first month in business (February.) I thought I was some sort of business genius.

But then came the holidays. Business fell flat and I had a cash crunch.

What I learned the hard way was two-fold: First, no one thinks about estate planning in November and December, and second, I needed additional profit centers if I was going to be viable in the long run. The next year, I added a few other areas of practice to the firm and when the holidays came around again, we were ready.

All good businesses do this. Starbucks originally only sold coffee and then they added other profit centers like food and music. When coffee sales are down, music sales might be up. When music dips, food still sells. Multiple profit centers evens out the cash flow.

So that is what you need to do too. What other products or services can you offer? What additional profit centers can you start?

Next, consider getting a line of credit. Obviously, the best way to avoid a cash crunch is to have extra cash available to you when you need it. How? The time-tested way is to have a line of credit from your bank ready for you when you need it.

I am happy to report that banks want to lend to you; that is their business. As such, it would behoove you to make it your business to be the type of business to whom banks want to lend. That means having a solid business credit record and rating, steady receivables, and not too much debt. Do that, get that loan, and your cash-crunch days are over.

Also, be sure to create a cash-flow- forecast. Review both your income records and industry trends to accurately estimate monthly cash flow. Project a year out, month by month, and you shouldn’t ever be surprised.

Finally, consider purchasing cash value life insurance. Life insurance can protect your business from a cash crunch in two ways:

First, look at maintaining a portion of your business’s cash reserves in a cash value insurance policy. Not only does this provide you with key person life insurance protection (see next), but additionally and relevant for our discussion here, it gives you access to capital that grows tax deferred.

Here’s how it works: You purchase a cash value life insurance policy and pay the premiums using your business’s cash reserve. As indicated, not only does the policy grow tax deferred, but it also allows you to take tax-free loans to meet your business needs.

The second way a life insurance policy can help you avoid a cash crunch is by insuring the key people in your organization because, let’s face it, death too often can create a cash flow crisis. Either a key money-making employee passes away or a partner in the partnership dies. Whatever the cause, the effect is the same: The business suffers from a shortage of cash. By insuring the key people in your business you will have the peace of mind knowing that should the unexpected occur, your life insurance policy will make up the difference.

Finally, as you can see, New York Life and I have teamed up to offer small business owners insights and ideas for how to make their businesses better. This column is our inaugural foray into that. We hope you find it interesting and useful. And I would love to hear your feedback. Feel free to email me at

Accessing the cash value of a permanent life insurance policy through loans will reduce the cash value and death benefit. Loans involve interest payments. The views expressed in the article are solely those of the author and do not necessarily reflect the views of New York Life Insurance Company. Neither New York Life Insurance Company nor its Agents or affiliates offers tax or legal advice.


Research, insights, and expertise for every aspect of your business.

Talk it through with an expert.

We're here to help.

get started
Further Reading