The Cash Flow Conundrum

Develop sound strategies to help your income stay ahead of your outgo.

The Cash Flow Conundrum

John Hafner photo

Here’s a one-question quiz: When it comes to money, what do you need to ensure business success? Sales? That’s where it all starts. Profits? Without something left after you’ve paid for what you’re selling, you won’t be able to go the distance.

But don’t forget one other component of the sales-and-profits relationship: cash flow.  

Your business will fail quickly without sales. It will fail in the long run if you can’t someday turn a profit. But without good cash flow, you will get choked off from sales and profits.

Cash flow is, very simply, how fast money comes in so you can pay your bills and invest in your business for the long term. The faster it comes in, the sooner you can pay what you owe and, better still, build up a cushion for slow periods. The slower your customers pay, the harder it can be to keep up with suppliers — and before you know it, you’re circling the drain to bankruptcy or business collapse.


Track It

So how do you improve cash flow? First, you have to know what’s really going on.

Tiffany C. Wright operates the business-consulting firm, The Resourceful CEO, based in Atlanta. She recommends a spreadsheet that projects cash flow three months out.

Each week track the cash coming in (paid accounts receivable, cash and credit card sales) and going out (payments against your own accounts payable, utilities, rent, maintenance costs and installment payments, such as your quarterly income tax payments). And each week, update the information and total each side of the ledger: money in, money out.

“Below the weekly sum, I run a cumulative running total of all the weeks,” Wright says. “If the running total is negative, that’s a huge problem that needs to be addressed.”

Even if you’re in good shape, though, the practice of closely projecting your income and expenses can give you a heads-up to potential speed bumps: a looming shortfall when there’s a seasonal downturn or a big bill due in coming weeks.

Hold on to Bills?

To address an immediate crunch, look at your own bills. “Companies can push out payables in weeks where cash flow is tight,” Wright says. Do you pay a bill as soon as it arrives, even though it has a net-30-day term? “Wait until the 27th day to put the check in the mail.”

Assuming your own credit card bills are under control, look at paying a bill with your credit card, she adds. “That provides another 30 days to generate the cash to cover the charge.”

Both are valuable tips, but these are emergency strategies to be deployed sparingly. Poor cash flow is one of those problems that will be made worse if you use stopgap solutions carelessly. Consistently early payments may qualify you for money-saving discounts (and consistently late ones are likely to draw penalties). And if you have to borrow against future profits to pay past debts — well, it should be easy to see where that leads.

So when kicking a problem down the road, make a point of picking it back up and solving it with a more sustainable remedy ASAP.


Get Paid

For the other side of the balance sheet — income — your solutions will demand foresight and require you to “train” your customers. Put time limits on the bills you send and enforce them. Consider a discount for especially prompt payment.

Enabling customers to pay by credit card puts cash in your hands a lot faster than waiting for the customer to send you a check. Wright points out that you can offer your business customers that option, not just residential consumers.

Cash flow that shifts with the season can be at least somewhat predictable. Use that knowledge to help yourself.

“A contractor needs to generate enough profits during ‘good months’ to carry the operation annually,” says Jim Herst, CEO of Perceptive Selling Initiative Inc. in Highland Park, Illinois. And don’t stop there. If you can, Herst says, schedule your work over time so you can invoice more consistently. Develop alternative services — even a second business — for the slow months to keep money coming in. (Think of the lawn-mowing and landscaping guy who plows snow in the winter.)


Talk It Over

Another approach to cash flow troubles is negotiation. That doesn’t mean just calling up your creditors and begging them to spread out your payment. Cash flow is really about timing, and sometimes outside eyes can help you see the possibilities more easily.

“A negotiation consultant can help the business owner find the best opportunities to improve their cash flow and create strategies that will be efficient so that they can take action even under time constraints,” says Devon Smiley, a negotiation consultant in Montreal, Canada.

Smiley identifies several points in the cycle of jobs-revenues-bills-profits in which you can work out timing arrangements to serve your needs better.

  • Seek payment schedules with your suppliers that mesh with your cash flow patterns: early payment incentives, terms of 60 days or longer, or other safety valves against the seasonal slump.
  • Help customers smooth their own payments so some of that cash reaches you during your own slow times, Smiley says. You’ll help your customer as well as yourself.
  • Rethink inventory management; too much money tied up in inventory when business is slow “can be a trigger for cash flow woes,” says Smiley. Look at last year’s drawdown and approach your purchasing more conservatively for next year. Arrange with suppliers to be able to return unused materials at the end of a season for “a cash flow boost as business gets quiet,” she adds.
  • Seek a line of credit from your financial institution, where interest is charged only when a withdrawal is made. The rates will be cheaper than a credit card, and, used carefully, can be a good safety net.

Each of those points requires negotiation to accomplish, but they allow you to do more than just react — you can plan ahead.

“Ahead of the quiet season, you can negotiate payment terms with vendors and include them in your contracts,” Smiley says. “This allows both you and them stability and confidence throughout the year.” If you know certain months will be good cash flow months, perhaps you can get a specific payment deadline date that matches your own cash flow instead of just accepting 15- or 30-day terms.

Client terms are another opportunity to plan ahead. Create discounts for early payments to boost slow-season revenue. Devise installment plans.

“A great example of this is signing a contract at the end of one season to complete work at the beginning of the next season and accepting installment payments during the months in between,” Smiley says.


Sharpen Your Skills

Negotiation is a skill at which some of us excel more readily than others. If you’re not so good at it, a coach may be able to teach you more effective approaches to ask for what you need.

“Saving on the time, energy and frustration of negotiation helps the small-business owner focus on what they do best — helping their customers,” Smiley says.

If you manage the cash flow conundrum, think how much more you’ll be able to do for your clients — and improve your cash flow in the process.



Comments on this site are submitted by users and are not endorsed by nor do they reflect the views or opinions of COLE Publishing, Inc. Comments are moderated before being posted.