Show Me the Money!

Roberts explains how to establish and manage cash flow in order to keep your business successful, profitable, and growing.

A friend of mine recently decided to pay a very expensive accountant to do a complete analysis of his business. He felt obliged to do this because he wanted to see whether something was going on in his business that he was completely missing. For years he had struggled, working 18-hour days, skipping vacations, and taking out second mortgages. Then suddenly, out of nowhere, it seemed everything began to pay off. His profits were up 20% over the previous year, job orders were piling up, and all the new efficiencies that he had wrangled his employees to adopt over the past few years were finally allowing him to go home on time.

For most of us it would have been the excuse to kick back, buy a bass boat and a six pack, and start to enjoy the fruits of all our hard work. My friend, however, found himself lying awake at night, worrying that things were running too well, and spending his days in the office expecting that the one variable he had overlooked would sooner or later bring it all crashing down around him. So, he finally decided to hire a professional to tell him what his unsettled mind would not allow him to believe—that he really had built a successful business.

The audit was exhausting and meticulous, and the accountant was a nuisance for several days. The accountant then announced that he would retreat back to his office to crunch the numbers and write the final, definitive report. Days passed with no news. Then, late one Friday afternoon, my friend got the call he had been waiting for. The report was finished, and he and the accountant carved out several hours early in the next week to go over the report in detail. A few more sleepless nights and he would have his answer.

Well, it turns out that he really did have a well-run and healthy business, and he scored highly in every category but one. The accountant told him that he had made all the right decisions as far as employee management, his plant and machinery were well within the limits of profitability, his marketing budget was cost effective, and his customer base was one that most of us would sell our grandmothers to have. Supplies inventory was a little high, but this was to be expected because he specialized in quick turnaround and needed to keep a good supply of raw materials on hand. It was something to keep an eye on but certainly nothing to worry about. My friend absorbed all of this information, waiting for the inevitable but.

It turns out that my friend was quite right in lying awake and worrying because he had overlooked one thing. The accountant told him that it was a similar problem with most small businesses like his.

 

Cash flow

Like many of us who run our own businesses, my friend had, over the years, developed the knack for juggling payments against payables and relying on his bank to bail him out when he dropped the ball with a revolving line of credit. This had become second nature to him and so ingrained that it never occurred to him that there might be a better way. The accountant told him that his business could only be considered truly successful when he had enough money on hand to pay every bill on time, without having to struggle with who to put off for the month and who absolutely had to be paid. The accountant’s recommendation was to begin depositing a portion of his profits every month into an account that would allow the profits to grow. He told him to freeze any new spending until there was enough money on hand to free himself and his business from the tyranny of stealing from Peter to pay Paul. For our businesses to be successful, we have to embrace the truth that cash is king.

Let’s take a brief look at the point the accountant was trying to make. We all know that in a perfect world, every customer pays up front when the order is placed, allowing you to use the cash to cover the cost of materials, employees, overhead, etc. We also know that we don’t live in a perfect world and net 30 is probably the best we can hope for, with a sizeable number of our customers coming in at the net 45 point, if we prod them hard enough. Seems that a lot of other businesses also juggle their payables against their billing, but if we can free ourselves from this vicious cycle, it’s possible to use the system to our advantage.

The formula is simple. If we build up a reserve of cash, then we can stop worrying about what to pay when and in-stead pay everything religiously at the very latest point that still allows us to remain current. This frees us up to concentrate on persuading our customers to pay on time. No, I’m not thinking about sending out some hoodlums to break a few bones. Although, I would love to try that on a few of my current customers. Fortunately, there are other incentives that can have equally effective results.

Offer a discount to customers who pay within a week of delivery. You will be amazed at how that can spur a bookkeeper to put your invoice at the top of his or her pile of bills. Make sure your invoices go out immediately after you ship the goods, and stamp a pay-by date in large letters somewhere on the invoice. Those who pay the bills will see that glaring date every time they shuffle through the pile as they try to decide which check to write next.

A company that I once consulted adopted this small change and saw a dramatic increase in on-time payment. The most important thing is to not let anyone slide. Keep a running tally, and if you don’t have payment by the day it is due, make sure someone calls your customer to find out why you haven’t received payment. Be polite, but be consistent and firm.

How many times have you told your bookkeeper to pay a bill to avoid hassling phone calls from the company waiting for your payment? Become that company. If you let customers slide, they will think that you are a secondary priority over the other bills that need paying, and you will always be last in line. Don’t worry about losing that bad payer to your competition. Force all your bad payers to use your competition, and enjoy the advantage that this will give you in the long run.

Don’t be afraid to ask for COD payments from accounts that are delinquent. If they are willing to pay for their next order upfront while they are going through a bad time, it can work to your advantage in the long run. Set up a payment plan and collect COD on any new orders until things turn around for them. Once this is working well, establish a system of cash transfer with your bank so that you can pay your creditors at the very last possible moment and make sure you stay on top of payments. At its simplest, cash-flow management means delaying outlays of cash as long as possible, while encouraging anyone who owes you money to pay it as rapidly as possible. It’s as simple as that.

My friend sleeps a little better now, and he hopes to be sleeping a whole lot better once he has implemented the cash-flow plan that his accountant drew up for him. It’s not an easy analysis to make and one that should probably be entrusted to a financial professional because of its importance. It’s obvious, though, that if you can achieve this magical balance early on in the life of your business, you will go a long way in establishing your company’s fiscal security, not to mention your own improved sleeping patterns. My friend has decided that the money was well spent. Now his only problem is that he will have to wait out that spending ban before he can buy the bass boat.

Gordon Roberts has a history in screen-printing production management that spans more than 25 years. He has held supervisory positions in shops that represent a broad spectrum of application areas and markets, including printed electronics, apparel, signage, and retail graphics. Roberts has presented training courses on the basics of screen-printing production and on shop management for the Screentech Institute and is presently a consultant for the screen industry. He can be reached at screenconsult@aol.com.

 

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