By Blake DuBose and Mike DuBose
Have you ever suddenly awakened in fear at 3 AM, wondering where your company will find the money to pay its bills? If you’re one of the 42 percent of business owners who lose sleep worrying over cash flow, you’ve been down that scary road. Along the way, the question always surfaces: “How did I ever get into this mess?”
The US Small Business Administration reports that half of new businesses won’t reach their fifth year, and many good businesses never even start. The culprit behind these failures is often lack of cash and sufficient credit. Your company’s balance sheet, accounts receivable, and hard assets may indicate prosperity, all while bank accounts are running on fumes. Negative cash flow can push successful businesses (and their leaders) into tailspins, with profit-driven efforts rapidly changing to panic and insecurity. We’ve been there and done that—frantically collecting receivables, laying off employees, selling assets, and seeking bank loans—and it’s not a pretty sight! Assuring positive cash flow takes practice and continual preparation. If done properly, leaders can detect problems brewing months away and develop proactive solutions.
Unfortunately, many business leaders don’t have sound processes in place to predict revenue, expenses, and cash flow. Then, when the well runs dry, they’re running for their lives! Let’s examine ways to maintain positive cash flows:
Develop budgets: Businesses should use zero-based budgeting, where everyone challenges revenue and expense projections. Build your budget by examining past patterns, underestimating revenue, and overestimating expenses. Think “realistic,” not “pie in the sky!”
Maintain cash flow analysis: You need to estimate in advance each month’s expected cash in the bank. Beginning with January, combine how much revenue you will generate with cash carried forward from the previous month, and then subtract expenses. This equals cash availability at month’s end, and this knowledge allows you to see tight months and prepare before disaster strikes. If you employ an EXCEL formula budget, cash flow estimates change automatically as budgets vary.
Monitor receivables: According toa study by Intuit, 22 million US small businesses are owned $33 billion in late receivables on any given day! Bill immediately after your business delivers and then verify that your invoices have been received. Smart employees form relationships with customers’ key financial staff and learn their unique billing procedures. Build systems that issue alerts when customer payments are late;then, follow up with the correct people.
Deposit checks promptly: Ask your banker for an electronic scanning device that immediately deposits checks, or make two manual deposits weekly.
Ensure profitability: Profit is the fuel that keeps businesses going. Few businesses show profits every month; however, if budgets show losses in months that typically make money, danger is imminent. Expenses must be managed and revenue maintained.
Sometimes, businesses must reinvent themselves or find new revenue sources (while continuing to focus on their profitable core business). Over 30 years, we watched once-rich streams of income diminish and were forced to generate new ones. The bottom line: innovate or die!
We believe businesses should do fewer things really well versus lots of things fairly well; however, having several reliable income streams is a wise cash flow strategy. We follow Jim Collins’ advice in Good to Great by pursuing what is most profitable, we are passionate about, and what we know most about. Strategy and ideals drive our companies—not money.
Balancing inventory and human resources: To havegood cash flow, you must have sufficient products and staff for customers’ needs, but not at excessive levels that consume too much cash. Some suppliers offer 90-day inventory floor financing.
Reduce and monitor spending: Many individuals inaccurately believe that being cash-rich equals profitability. However, cash eventually runs out for low-profit businesses. Effective leaders watch their budgets like hawks! You simply must take in more than you spend for your business to stay alive.
Use credit cards: Outside of payroll, 80 percent of our four companies’ expenses are charged to American Express, generating valuable airline and hotel points. Why pay by check when you can reap rewards like free hotel rooms and flights? Pay full balances on time to avoid hefty interest rates and maintain high credit scores.
Time large expenses: Balance liquid cash with hard assets like buildings and property (avoid placing too much money in hard assets, even if it means passing up good deals). Unless you’re certain your financial future is bright, pass on toys like luxury cars. Right now, cash is king!
Establish credit lines early: Many business owners underestimate cash needs by assuming future profits will materialize. Work with bankers to establish long-term, low-interest loan access for more credit than you need when things are going right—that way, you’re covered if unexpected problems arise.
Paying interest is wasteful, so avoid borrowing money unless it is necessary. We promote a debt-free, saving mentality; however, even we sometimes need credit when customers pay late and liquidity disappears.
Extend credit cautiously: Before providing goods or services to customers, check their credit histories and obtain signed contracts. We have watched in horror as reputable companies were dragged into failure by bankrupt clients. One option is to seek personal guarantees when extending credit.
Maintain aggressive marketing: When success arrives, don’t relax. Rainy days will come again, and you want to keep cash rolling consistently in. Marketing and advertising are the last budget items that should be cut in dire circumstances.
Save! When times are good, don’t pocket excessive profits or spend frivolously. Leaders should prepare for the future with at least three months’ worth of company savings in interest-bearing accounts with low banking fees. Avoid investing company funds in the unpredictable stock market!
Offset credit card fees: Allowing customers to use credit cards robs businesses of 3+ percent of gross revenue, but provides near-instant deposits. To offset the loss, many businesses now charge customers small fees for using cards or offer rebates for early or cash payments.
Negotiate payment terms: Ask vendors for 45-60 instead of 30-day terms. We pay bills on time to avoid finance charges or penalties and build good payment habits. When cash is tight, weigh each payment’s importance and delay those that are least essential to your business. However, don’t become known as a “late payer,” which can cause vendors to lower your credit ceiling. The cleverest businesses use 30-day terms, then pay bills with credit cards (thus extending payment terms to 60+ days).
Maintaining positive cash flows throughout the year is a continual process that is critical for healthy businesses. Remember: “Hope for the best, plan for the worst!”
