The Secrets of Cash Flow Management in Small Businesses

Happiness is – positive cash flow – or as a humorist once stated, “the problem is too much month at the end of the money.”  A common problem affecting small to moderate size businesses is cash flow.  If you are expanding or doing less business, it will be a major factor.

Good cash management depends on a business plan and a marketing model which aids in the regulation of cash.  For example, a successful company may employ various forms of lead development, all of which require cash outlay.  Marketing dollars are spent; sales are made then processed, followed by an installation (which may be weeks or months later) – this creates an investment in your backlog.  If you advance your salespeople on sales made and approved, you have increased your investment, both of which could represent 10 to 20% (minimally) of the sales being processed.

For the latter reason alone you need controlled policies for taking deposits on all contracts; as an example, require deposits on all sales (usually 40% of or more).  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. Progressive payments on larger contracts or those with multiple products or services including payments upon delivery or partial completion also speed up the collection process and enhance cash flow.

It is not uncommon to examine the operating statement of successful companies and find that despite the fact that they are profitable, they don’t have sufficient capital to pay their bills on time, pay adequate compensation to the owner(s) or to expand their business.

Learn how to read a balance sheet (your accountant can show you how).  Have your bookkeeper prepare a “cash report” weekly.  Understanding these two bookkeeping assets will help you avoid making mistakes in spending.

If you haven’t done so already, 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 annually.  Modern companies no longer pay weekly (you will need a plan to introduce this to your employees if they are used to being paid weekly).

Here are some additional suggestions to aid you/your company in creating positive cash flow.

1. 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 to accumulate cash.
2. Decrease your “turn time” – This is the amount of time it takes you to complete and collect a contract once it has been approved.  Here is an example: If it takes 6 weeks to complete a “job,” 48 weeks* divided by 6 weeks equals 8 turns per year. So, the more times you can turn your money in a given year will reduce the amount of cash necessary to operate your business. (* 52 wks less “lost” time and holidays).
3. Pay your bills on time (and attempt to get a discount for prompt payments) – A 2% discount for prompt payment on the 10^th 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.
4. Utilize “Cut-off dates” on purchasing. If you purchase from a vendor/supplier who offers 30 days (terms), and sends a statement at the beginning of a new month for all shipments made through the 27^th day of the preceding month, place large orders after the 27^th and/or in the first week of the new month.  Use a credit card and extend the payment due date by another 30 days.
5. 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.
6. 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.
7. Give discounts for prompt payment – On cash contracts create a phrase such as – “The balance of $xxx 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 x%.  Balances paid after that date are subject to interest at the rate of x%.
8. Cost avoidance – Postpone spending whenever possible, but not if the postponement would cause an increase later. (i.e. equipment maintenance).
9. Cost elimination – Do away with operations that aren’t profitable or are only marginally productive (i.e. products or outmoded procedures).  Every company has a few “sleepers” and “sacred cows”.  Get rid of them.
10. Cost reduction – Set measurable goals and monitor them.  The worst mistake you can make is to enforce an across-the-board percentage cut in costs.  It’s unfair, impractical, and in the long run, ineffective.

These changes are not complicated, but they do require thought and discipline, and they represent the keys to increasing cash flow.

For complete information on this and a wealth of other business management material, check out our recorded package How to Run a Profitable (or More Profitable) Business.