Oct 1, 2012
No matter what industry you serve. Your business can be fickle. Factors such as seasonality, dependence on government spending and the way the overall economy can influence spending can present unique challenges for businesses.
With so much volatility looming, your company is always at the risk of being faced with cash flow issues. While most of your companies probably have accounting department (even if it is you), it is important to recognize that cash flow is a different animal. With customers continuing to seek flexible terms and the nuance of accrual based accounting, cash flow becomes even more unpredictable because an organization can be generating strong profits but somehow be operating with limited cash availability.
Unlike profitability, which is simply accounted for by revenue less cost of doing business, cash flow is dependent on the actual collection of receivables generated from the work that is being performed. Therefore, you can be showing a profit because you have invoiced for work being done, but you may not see the cash immediately. In fact, in some industries it isn’t uncommon for receivables to linger for 30, 60 or even more than 90 days.
It can be detrimental to your business when large chunks of receivables start aging. It can cost you interest, relationships with suppliers and problems with customers. And while the only genuine way to create more working capital is to continuously generate profit and keep the cash in the business, there are ways for businesses to be more strategic with cash flow:
Receivables Management: Most of your customers have a plethora of bills to pay. Many companies don’t have stringent policies for staying on top of receivables by sending reminders, making calls when they come due and building relationships with customer payable teams. If you aren’t calling and asking for payment, the customer may be thinking you don’t need the money that badly. I often play on a well known metaphor and say “The squeaky wheel collects the past due bill.”
Down Payments: At some point it seemed that asking for down payments became taboo. Probably at the point in which you could finance a house with no money down? Regardless, salespeople often feel that requesting money is a potential sticking point in getting the deal. The problem is that depending on your business, a project or final deliverable can take months. Progress billing can alleviate some of the strain, but if you source products from others it doesn’t account for the fact that most of your vendors want payment in 30 days. A substantial down payment that covers a good component of the “cost” of the equipment can allow for better management of cash flow throughout the job.
Credit Worthiness: There are so many tools for understanding customer credit worthiness. A lot of companies want or need the business so bad that they will overlook bad credit or not even check it. Make sure at the very least you know what you are getting into by using tools like Dun & Bradstreet Credibility to determine what type of pay to expect from a customer. I know that deep down you never want to say no to an opportunity, but sometimes the best business deals you do are the ones you don’t.
Credits, Rebates & Co-Op: While this isn’t available in every industry. In certain lines of business there are a lot of opportunities to earn credits, rebates and marketing dollars from your business partners. While applying for them and collecting the dollars isn’t always easy, it can be another source of cash (And profit). However,just like receivables management, this needs to be cared for so you don’t end up with tens or hundreds of thousands in rebates that aren’t claimed.
Borrow When You Don’t Need It: I know it sounds funny (and perhaps against some of your personal financial practices), but this is more of a statement of preparation for growing businesses. I often hear business owners saying, “I’m all cash-based and I don’t need any credit.” I think that is wonderful, and I hope that you can sustain that forever. But when you are running that way, it is a good time to work with a bank to set up a line of credit. What happens if you run into a huge opportunity that stretches beyond your resources? I call this a “just-in-case fund.” There is nothing wrong with running a cash business, but not being prepared for volatility (good or bad) is a risk you should not and do not have to take.
In any business, cash flow can be the difference between success and failure. The focus on it should be a priority just like sales and marketing, however too often that isn’t the case. Without cash, all the sales in the world mean nothing. A sound business strategy aligns your resources to your vision. Make sure your strategy accounts for both.
What are your best tips for driving healthy cash flow?