Cash Flow - The Key to Success

When your company is growing, one of the most important things that you can do is take every step necessary to ensure that you know where your money is coming from, and where your money is going. By tracking your cash and understanding its flow, you are able to predict lags in your ability to pay employees or suppliers, to identify which customers are slow to pay, and to take action regarding both. It’s all about careful management, and by following the six steps below you will put yourself into a much better position to keep things under careful control.

Create a Cash Flow Projection

What is a cash flow projection and how can it help? Let’s start with what it is not. A cash flow projection is not a crystal ball. It’s a way of taking a bunch of highly pertinent factors — including your upcoming expenditures, the way that your customers have historically paid their bills, and the amount of time that your vendors are willing to let you take to pay your own bills — and using them to make an educated guess about the future.

The more care you display in not making too many assumptions about either clients’ or suppliers, the more accurate you are in predicting things like capital expenditures and interest being charged on loans and what principal payments will be, and the more inclusive you are of remembering the variables that impact your business, the more accurate your projection is likely to be.

The best way to begin preparing a cash flow projection is by assessing how much money you have immediately available and combining that with any receivables that may exist. Your best resources for identifying all possible sources of money are your staff, from the sales people who are waiting for clients to pay to those in your credit or finance department. The question to ask them is simple: What’s due to come in to us, and when is it going to get here?

After you’ve identified that, you need to follow essentially the same process for monies that are due to flow outward. You want to identify what is being spent and how much it will cost for each and every outlay, whether it is an interest payment, a cash dividend owed, a piece of equipment to be purchased or salaries to be paid to employees.

This is not an easy process, but it is an important one The more accurate your cash flow projection is, the more successfully you will be able to fully understand your business and see its weaknesses and strengths.

Identify The Point of Profitability

Every business has its own break even point – the point after which it is no longer spending more than it is making, and begins to make a profit. When you make yourself aware of what that point is, you set yourself a goal, and that can help you with a lot of your future plans. No matter how many needs you have for new equipment, more employees, and other enhancements, it is important to keep from having too much money going out and too little coming in. Identifying the point of profitability helps you keep focused on that goal.

Better Management of Receivables

How many times have you found yourself wishing that your customers would pay faster? If you’re like most business owners, it happens pretty frequently. But rather than wishing, you can take action to improve your receivables, and in doing so you can make your cash flow a lot more freely. There are a number of strategies that you can use to either incentivize your clients to pay faster or protect yourself against payments coming in too slowly. Some of these include:

  • Introducing an automatic credit check process for all new clients
  • Provide discounts for fast payment
  • Request down payments on new orders as they are placed, and particularly for large orders
  • Get your invoices sent out as quickly as possible
  • Track invoice payments so that as soon as a client is beyond a due date, collection efforts begin immediately
  • Identify clients that are consistently slow to pay and either enforce a cash-on-delivery (COD) system for them, or refuse to continue doing business with them

Better Management of Payables

The other side of cash flow is payables, and that needs to be managed to the same degree as do receivables. This is especially true for companies that are experiencing rapid sales growth, as there are many instances when the increase in sales creates a corresponding increase in expenses that can be difficult to pay for.

The best way to handle this is to avoid becoming complacent and thinking that the increased revenues are going to pay for everything: instead, try to control costs by paying close attention to where they are coming from and ensuring that they are necessary. Some other steps to help you manage payables include:

  • Waiting until the day that an invoice is due and then making the payment via electronic funds transfer rather than writing a check. In doing so you are keeping your suppliers happy by paying on time, but holding onto your cash ‘til the last possible moment.
  • Check to see whether any of your vendors are offering discounts for early payment and then – if they are - compare the benefits of using the discount versus keeping the money in your own bank.
  • Don’t try to be the first one to pay. Check to see what your suppliers’ terms are and then keep current, but not early. You get no benefit for paying two weeks before an invoice is due, and in doing so could conceivably put yourself in a shortfall situation.
  • Make sure that you stay in constant touch with your suppliers and maintain a good working relationship with them. Discuss financials freely so that if you ever find yourself in a bind, they will trust you and be more willing to extend a delay terms when you need one.

Understand that the lowest price is not always the best deal for your company, and especially not when it comes to cash flow. There are definitely times when a flexible payment schedule is worth its weight in gold — a few dollars more in expense may be well worth it if it comes with an extra two weeks to pay.

Know How to Manage a Shortfall

As hard as you will work to avoid it, there may come a time when you simply find yourself short of the cash that you need to satisfy your payroll, your vendors, or your creditors. This is normal, and not something that you need to beat yourself up about or feel is representative of a failure —  but it is also something that you need to know how to manage.

The most important thing that you can do is make sure that you are constantly checking on the health of your business so that you can see the problem on the horizon and act accordingly. When you can anticipate a shortfall and request a loan in a calm and reasonable way (rather than on an emergency basis), it inspires much more confidence and willingness to extend a loan.

One way to head off a shortfall problem long before it happens is to simply anticipate that at some point it will happen and to prepare for it by having a line of credit already in place. A line of credit at the bank means that you will have a preset limit against which you can borrow cash at any time. A line of credit is something that banks are generally more willing to extend before there is an actual need.

There are some instances where a bank simply says no to your request for a loan. When that happens it is important to remember that the vendors that you work with have a vested interest in your business continuing to thrive, as they want you to continue spending money with them. If you are open and honest with them, there is a good chance that they will be willing to offer extended terms to help you out, especially if you have been forthright and open with them in the past.

Consider Other Options

There are additional options that are available to you should you face a cash flow crisis. One is to connect with a financial services business that will provide you with cash in exchange for your outstanding receivables. Though they will deduct 15% for their own profit, using these businesses (known as “factors”) can save you the time, trouble and expense of collecting payments on your own, and more importantly gives you an influx of cash when you need it.

You can also turn to your clients, and particularly the ones that have the biggest balances, and offer them a discount off of their bill for immediate payment. At the same time, take a careful look at which of your clients is most delinquent and pursue them more aggressively for the money they owe. If necessary, you can sweeten the pot by offering them a discount too.

Take a careful look at the equipment that you have on hand. Office furniture, computers, machinery and even phone systems may be able to be sold or leased back when you need cash fast, though doing so may put you in jeopardy of losing your equipment entirely if your cash flow situation becomes dire enough that you aren’t able to make the payments that you’ve arranged for.

Finally, when it comes to making difficult decisions about who to pay first when cash is tight, be sure to take care of employees first. They are your most valuable asset, and if you elect not to pay them they will elect to leave. Next on your priority list are the suppliers that are most valuable to you and on whom you rely to keep your business operating. The others are the ones to approach and ask for a little leeway.

For help with your business cash flow projections, call our office at 727-345-7790.