• The payables number on the balance sheet keeps getting bigger.
• Supplier statements are coming in with "PAST DUE" stamped in red across their face
• A flurry of cash-collecting activity begins just before paychecks are to be issued.
• In more extreme cases, stern-voiced collection people call to "express concern."
• A withholding payment is missed.

What follows is a simple three-step plan. It’s so simple, you might be tempted to pass it off as common sense. However, using these three steps, we've helped companies go from critical cash starvation to fiscal health in four to fourteen months.

Step 1 — Determine your company's financial condition

Most small businesses manage from profit and loss statements and balance sheets. They can be useful. And depending on how candid you’ve been with your accountant, they can provide a more or less accurate view of where the business has been. However, you also need to know where you are and where you’re going. To determine where you are, calculate a break-even point — the level of revenue required to cover fixed payments, including any negotiated payments on past-due debts, from gross profits. Then create a cash plan — a weekly schedule of expected income and payments for the next 90 days. (learn more about our condition assessment service...)

On the first draft, you’ll probably discover the answer is that you simply don’t have the revenue to cover the payments. What that means is fixed payments must be cut. Break-even points can be lowered dramatically: we've cut some by as much as 40 percent.

One warning: in the cash plan, do not be tempted to include the revenue from an account you’ve been working on for the past two years that you just know is going to come around any day now. Irrational optimism is the enemy of good cash planning. Stick to revenues you know you have.

Step 2 — Talk to creditors

Using the cash plan as a guide, call your creditors - don't wait for them to call you - and tell them what your temporary situation is and what you can manage realistically. Ask them to extend or reduce your payments, and then make sure you do exactly what you say you’ll do. Most creditors are happy to work with their customers who have occasional problems as long as they keep their promises on special commitments.

Step 3— Slash expenses

Expenses take many forms. Look at a variety of areas. Start with the people expenses, but be sure to begin with the owner's compensation. When a company owner mandates across-the-board cuts for everybody in the company but himself, predictably, the word gets out. Just as predictably, the resulting morale problems can shove the company further in the hole.

Next, look for people you don't need. A distribution company had three underemployed people handling three jobs: a freight clerk, an accounts receivable clerk and a bookkeeper. Their jobs were still in place because that's the way it had always been since long before the days of computers. Coming from outside the company, we recognized the situation immediately. By realizing the time-saving changes technology had made, the company was able to combine three positions, increase the compensation for the resulting single job and save most of two salaries.

Next, enlist your employees’ aid by putting everyone on a performance-based compensation program — pay plans with a small fixed component and a large variable component. Make sure employees understand that if the company wins big, they win big.

Finally, after dealing with personnel expenses, go ruthlessly through the operating statement looking for expenses that do not add value to your business: luxury boxes at the stadium, leases on expensive cars, non-critical association memberships, even charitable donations.

In looking for less obvious expenses the business owner can start by asking "Why do we do that?" For instance, one client sent out monthly statements even though (we determined from his answer to the above question) his customers paid by invoice. He saved wasted labor, computer time, paper and postage by not sending out statements. If the answer to "Why do we do that" is "We’ve always done it that way," you probably have-a good candidate for a cut.

Just reacting to creditor calls is unlikely to solve a cash shortage. Effective planning and discipline usually will. Seems like common sense, doesn't it?

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