Effective Cash Flow Management

A common problem affecting all small to moderate size businesses is cash flow. If you are expanding or doing less business, it will be a major factor.

It is not uncommon for us to examine the operating statement of a successful company and find that despite the fact that they made money in the preceding year, they still don’t have sufficient capital to pay their bills on time, pay adequate compensation to the owner/shareholder or to expand their business.

Here are 13 simple, effective methods to correct this:

1. Don’t employ checkbook management. Do not make purchases based on the amount of money in the checking account. Use your balance sheet or a cash flow statement to determine cash availability.
2. Spend less money than you take in (good economics). If you have a monthly, quarterly or annual budget based on anticipated business and anticipated net profit, spending less than what you earn enables you accumulate cash.
3. Decrease your “turn time”. This is the amount of time it takes you to complete and collect a contract once it has been approved. Example: if it takes 6 weeks to complete – – *48 wks ÷ 6 = 8 turns per year. A simple way to remember this rate is the more times you can turn your money in a given year reduces the amount of cash necessary to operate your business. *(52 weeks – lost days and holidays)
4. Pay your bills on time (and attempt to get a discount for prompt payments). A 2% discount for prompt payment on the 10th of each month will earn you 37% when compounded annually. You could actually borrow money at 6 to 8% to pay your bills on time and that loan would earn you big dollars in return.
5. Take advantage of the “cut-off date” for purchasing. If you purchase from a vendor/supplier who offers 30 days (terms) and sends a statement in the beginning of a new month for all shipments made through the 27th day of the preceding month, place large orders after the 27th and/or in the first week of the new month. Use a credit card and extend the payment due date by another 30 days.
6. Convert from weekly to biweekly payroll. This will increase your cash on hand by the value of one week’s payroll and reduce bookkeeping entries from 52 to 26 times. Most modern companies no longer pay weekly (you will need a plan to introduce this to your employees since they are used to being paid weekly).
7. Reduce your accounts receivables. Collect all balances on the day the work is substantially completed and collect for all change orders or extras when they are executed.
8. Discount (customers) for prompt payment. On cash contracts create a phrase such as: “The balance of ______ is due on the day the specified work is substantially completed. If paid on the date of invoice, which shall be considered the day of completion, the customer shall be entitled to a discount of _______. Balances paid after that date are subject to interest at the rate of _____%.
9. Require deposits on all sales; they contribute to cash flow. For corporations, they are (mostly) treated as liabilities and represent no tax consequences until a contract is completed (Deposits on sales made to homeowners are regulated in some states).
10. Allow progressive payments, particularly on large cash jobs. Payments upon delivery or partial completion speed up the collection process and enhance cash flow.
11. Postpone spending wherever possible, but not if the postponement would cause an increase later. Example: equipment maintenance.
12. Do away with operations that aren’t profitable or only marginally productive. Could be a product or outmoded procedure. Every company has a few “sleepers” and “sacred cows”. Get rid of them.
13. Set measurable goals and monitor them. The worst mistake you can make is to enforce across-the-board percentage cut in costs. It’s unfair, impractical, and, in the long run, ineffective.

These changes are neither complicated nor simple. They require thought and then discipline, but they represent the keys to increasing cash flow.