Managing Cash Flow for Improved Profits
April 26, 2010
Cash flow - how much money is flowing into and out of your business - is an easy concept to understand. Still, not every contractor is aware of the impact that cash management has on the bottom line. That’s because the importance of managing revenue is far easier to recognize in some types of businesses than it is in others.
Take home building, for example. When a builder takes on hundreds of thousands of dollars in short-term debt in order to build new homes, it’s obvious that he or she must generate substantial positive cash flow in a hurry if the business is to survive.
Of course, the situation is not that dramatic for most contractors, but skillful cash management is critically important in every service business, from the smallest to the largest. Losing control of money has generated more financial headaches for small-business owners than temporary red figures on the bottom line. On the other hand, a sensible cash management system can provide a comfortable cushion during those inevitable slow times when the phone just isn’t ringing as often as you’d like.
Here are nine powerful techniques that can help you to improve your cash flow and net income right now:
1. Never allow any of your money to lie idle. If you don’t already have one, open a money market account at your bank and have it linked to your business checking account for telephone or online transfers.
Deposit all of your daily receipts into the money market account where they will immediately start drawing interest. Never deposit receipts directly into your checking account. Keep a minimum balance in the checking account and transfer cash by phone or online only as needed to cover checks written. The banks have made this technique so easy to use that there is no longer any reasonable excuse for not using it.
2. Don’t be in a hurry to pay your bills. There’s good reason why checks are slow to come in from people who owe you money. It’s because hanging on to cash as long as possible keeps that money available to draw interest.
That’s why it’s important for you to set up a system to pay your bills only when they come due. It’s easy to do, and it moves you up another rung on the ladder of professional cash management.
Don’t jeopardize your credit standing by paying bills late. Pay your bills just before they’re due - not before, not after. It’s especially important to avoid late payment on credit card bills because of the oppressive penalties that most banks are now putting into place.
3. Be aggressive collecting accounts receivable. If you do any of your own billing, it’s important not to allow those receivables to go untended. You’ve earned that money; you have a right to it, you need it.
Dunning late-paying clients may not be your favorite pastime, but setting up an accounts receivable file and following through on late payments is as important to your financial success as the quality of the services you offer. If your clients learn that you are cavalier about money owed to you, you can be certain they will stretch your patience (and your cash flow) to the limit.
4. Diversify to keep cash flowing. This is an important strategy when calls are off and labor and parts sales are down. During slack times, any work is better than no work at all. Consider offering special services or products during slow periods at sale prices that do not satisfy your usual parameters of profitability. That approach makes sense by providing work to help smooth out the inevitable and costly ups and downs of cash inflow.
5. Maintain a cash cushion. Try to keep enough cash in interest-bearing accounts to cover normal operating expenses for three to six months. There is nothing like the peace of mind and self-confidence that comes when you don’t have to sweat out next month’s rent or next week’s payroll during a business slowdown. Also, keep in mind that your cushion money is making money for you in those interest-bearing accounts.
6. Develop a personal relationship with your banker. Handling money is a banker’s job, and most are very good at it. Even if your operation is relatively small, it’s a good idea to develop a personal relationship with the manager at the bank where you do business. Discuss your financial picture honestly with the manager of your local branch. You’ll get some good ideas and a favorable ear should you ever need a little financial help.
7. Let your computer help you to manage your cash flow. Whether you use of one of those heavyweight commercial software packages designed for service businesses, or whether you use Quicken or Money on a desktop PC, trust every aspect of your business, including investments, to your computer. The financial reports and analyses that modern software can produce at the touch of a button can be vitally important management tools for improving cash flow and bottom-line profits.
The most popular software packages designed for small business are infinitely easier to use than they were as recently as a couple of years ago. More important, they will teach you in dramatic fashion how much you can benefit from a sensible cash management system.
8. Consider leasing. Most financial advisors agree that leasing products like cars or vans for personal use is usually not financially advantageous. But business is a different animal entirely.
“The nature of business accounting is such that leasing can be the most sensible approach to many types of capital investment,” said Thomas Normoyle, CPA, Huntingdon Valley, Pa. “It usually makes sense to lease if you will be able to use the cash in your business or in your investments to earn a better return than the cost of leasing.”
Talk to your own tax advisor about this the next time you’re considering a large capital purchase.
9. Spread the gospel. To do a professional job of managing cash, you must have a steady flow of the stuff coming in. Many service contractors keep themselves so busy dealing with day-to-day problems that they never get around to putting together an aggressive business-building marketing program. That’s a serious mistake. Marketing is an essential ingredient in the recipe for growth - even survival - for any service business. Yet, many owners shy away from all but the most obvious ways to promote their businesses. For some, their entire marketing program consists of a Website or an expensive ad in the Yellow Pages.
Some time, some place, someone may have bought the necessary equipment, placed an ad in the Yellow Pages, and sat back while the phone rang off the hook and the money poured in.
Maybe, but not likely. Building a growing and profitable service business requires an ongoing marketing program. There is no other way. Competitive prices alone won’t do it. A high degree of professional skill alone won’t do it. As one entrepreneur puts it, “You have to tell the world your story. If you don’t do it, no one else will.”
Taken individually, good cash management techniques may seem inconsequential. However, when you blend them together in a consistent manner, they will form a significant and permanent contributor to your bottom line and your economic future.
Publication date: 04/26/2010