This is a money/cash flow issue, making sure there is enough money coming in to meet the monthly requirements of paying your salary, overhead, vendors and labor (the money going out). For most young and growing businesses this is a plaguing problem.

There are a number of reasons why this can be a problem for any business:

1. the company is not profitable
2. the company’s accounts receivable and/or inventory is expanding faster than revenue is rising
3. the revenue stream is seasonal – high revenue where it is difficult to keep up in half the year and slow (people looking for work to do) in the other half of the year; for example a lawn mowing business.
4. the company’s revenue is growing faster than working capital can support.

Here are some ideas for solving these lingering problems.

1. No profitability – the primary causes for this is not having a profit goal for the year. More than 85% of business owners won’t set this goal for the year.  They like to be surprised when their controller or accountant tells them how much they made or lost at year end.  This is like going to a Colts game and not knowing the score until the game is over – not a very exciting way to watch a game; not a very good way to run a business.

First determine how much money your business should be making per year, this is determine by profit as a percentage of revenue (check your industry standards to determine this) or use 30% return on equity (equity on balance sheet X .3).  The most important thing is to determine how much money you want to make and manage to it.

If you do create a budget for the year, make sure that you look at it monthly and manage to it.  And don’t change your profit budget.

2. Growing accounts receivable and inventory faster than revenue.  One of the biggest challenges for growing businesses is to manage the growth in current assets; every dollar growth in accounts receivable or inventory sucks cash out of the business.  Controlling the growth of these two assets is really important to managing cash flow.

Review your accounts receivable aging report monthly.  Follow up quickly on slow moving accounts.  Take action and don’t pass this responsibility to someone else without looking over their shoulder regularly.  Also, do a turn analysis on accounts receivable and inventory quarterly and compare that with the previous year and see if the days on hand of inventory and accounts receivable is getting better or worse.

3. Seasonable revenue.  It is really difficult to grow a business when revenue varies widely from one season to the next.  Solving cash flow problems in this type of business is only accomplished when enough cash is made to carry through the down months.  This can only be accomplished when revenue and profit targets are established and managed to through the good times and controlling expenses in the slow times.  Planning is critical to this type of business.

4. Dramatic growth.  Fast growing businesses will have more cash stress than businesses that are growing slowly. As revenue grows, accounts receivable and inventory expand to keep up with the growth in revenue.  Labor is also accelerated to perform work that gets paid for down the road.  If extended payment terms are granted to new clients to induce them to buy more, the problem becomes compounded.  In a business that is growing, cash flow planning is critical because CASH sustains the growth, any hick-up in financing, collections or a glitch in inventory management greatly enhances the cash flow risk.  A Cash Flow Forecast is a early warning system to alert you when you will have a cash flow shortage – but you will have plenty of time to prepare or change direction.

Summary – I would strongly recommend a cash flow forecast to reduce the stress you have relative to your business.  It will help you plan better, see into the future and give you a better nights sleep.

To Your Business Success:

Dan Lacy
Growth & Profit Coach, Financial Strategist, Cash Flow Doctor, CEO Mentor

Unfortunately, many business people have not come quite as far since the Depression, in their ability to discern what makes a company or organization work and what needs to be done to ensure its survival. There are basically nine “danger signals” that indicate the strength and viability of a business is deteriorating:

1. Declining gross income, combined with operating losses. In most instances, declining sales will not be targeted as a problem until operating losses deplete cash reserves. Normally operating costs will remain high and not be adjusted as sales decline. This creates the operating losses that eat up cash reserves.

2. The absence of an operating plan to guide the company. Most managers do not use a carefully crafted planning procedure to create an on-going validation system. If a planning document exists, it is often shelved and forgotten as day-to-day concerns take precedence over future goals. When this happens, management has little or nothing to measure itself against and is oblivious to hidden dangers.

3. Breakdown in communications between upper management and the labor force. Failure to communicate vertically creates a situation where upper management cannot identify conflicts that exist in the on-going operation of the organization.

4. Inadequate cash flow. The ability to generate cash flow is the key ingredient in a successful business operation. Without adequate cash flow, an organization is doomed to failure. While it is normal for most organizations to have seasonal fluctuations, balancing these adjustments is critical for the survival of any organization.

5. Inability to convert accounts receivable to cash promptly. The slow collection process of accounts receivable can be a danger signal that a poor job of screening accounts and granting credit has taken place.

6. Inability to convert inventory to cash promptly. A slow down in inventory may signal a problem in the quality of products shipped.

7. Cash tied-up in nonproductive assets. Investing heavily in a new office building, equipment and personnel without careful planning can be a nonproductive use of assets and can destroy a company.

8. Amounts owed to vendors. When an organization is unable to meet the payment terms of their vendors, not only does a serious cash-flow situation exist, the future credibility of the company is in doubt. Long-term business success depends on the goodwill a company is able to generate with its creditors.

9. Low employee morale. Most employees truly want their organization to be successful. When a company is without solid direction, morale declines and with it goes productivity.

In today’s economic climate, if any of these ring true with your business, it is time to take swift action.

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In 30 years of consulting with businesses, this is a common problem aired by most business owners. Smart business owners are frustrated because they are not making the progress they want personally. Not making the money they should, not seeing the growth in their business and not seeing their largest personal asset improve in value.  There are two primary causes of this, this article is going to speak to the first and next week’s article will deal with the second.

The most common problem business owners have is not understanding and utilizing the key performance indicators that monitor the performance of their business.  Not one of you reading this article would take a long trip in your car without looking at the cash gage or viewing the speedometer periodically to pace yourself against the posted speed limit.  The best performance indicators of a company are accurate and timely financial statements (profit and loss statements, balance sheet and statement of cash flow).  But less than 30% of business owners take advantage of this resource.

Let’s quickly discuss what understanding monthly financial statements will do for the owner of a business:

1. It is a report card on the performance of management that everybody outside of the business uses.
2. Bank and other lenders place a major portion of their decision making on the performance of the business as stated by the financial statements.
3. Vendors and other creditors will rely on financial statements to make key credit decisions.
4. Investors will strongly rely on the financial information from the company to determine if they should make the investment or not.
5. The government relies on them to assess taxes.
6. Purchasers of businesses will rely on financial information to decide if they want to purchase and how much they will spend for the business.
7. It is a tool to tell you, as the manager/owner of the business if you are on the right track in attaining your company and personal financial goals and objectives.

Financial statements provide the reference point for you as a manager to guide your company.  I believe that accurately prepared financial statements reflect all the activities in the business: employee satisfaction, product quality, on-time delivery, customer satisfaction, and all of the key financial indicators: revenue, margins, profit, cash flow and upside potential.

Most businesses leave thousands of dollars on the table every year in loss profitability because they don’t use financial statements as a management tool.

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Historically, being a contractor is a great vocation and a productive way to make a great deal of money.  Although 2008 and 2009 were not great years for contractors, predictions are that 2010 and 2011 are going to be much stronger than the last 24 months.  How do you capitalize on that opportunity?

I am a believer in copying things that work and after 30 years of working with business owners, those that have the most money, least amount of debt and stress are the contractors that focus their attention on the bottom line. Yes, making profit, month after month, quarter after quarter and year after year.  They use every method they can to insure that the actions they take every day will make them money.

Want to your spouse to see big pay checks – focus on profit.  Want your kids to have a good education – focus on profit. Want to retire early and wealthy – focus on profit.  Want your banker to loan you money when you need it – focus on profit.  Want to have cash liquidity when you need it – focus on profit.

One of the tools used by successful contractors as a way to manage the performance of their business is their monthly financial statements.  They not only tell if the company was profitable for that month; but also if the company wasn’t profitable, why it wasn’t profitable.  Was revenue lower than expected, margins off or expenses high?  Information is powerful and with current and accurate information, the contractor can be successful.

Where the contractor gets into trouble is when he shoots from the hip and makes a decision without good data.  The contractor wouldn’t be caught dead on a job site without a tape measure. Financial statements are the business’s tape measure.   When the profit and loss statement shows profitability, money will be flowing freely.  When the company doesn’t show a profit, management will always be struggling with having enough cash to operate their business.

Here are six benchmarking tools you can use to determine if your company is on the right path from a financial performance measurement standpoint.  This information was cleaned from a hundreds of other contracting companies as of January 2010.

• Gross profit margins 45% of 50% of revenue
• Net profit 5% to 9% of revenue
• Outstanding accounts receivable – 22 days to 35 days
• Outstanding accounts payable – 29 to 35 days
• Debt to equity ratio 1.6 to 2.9 to 1
• Sales per full time employee $81,000 to $112,000 per year

The financial management function for most contractors consists of looking at the outstanding unpaid bills, outstanding invoices and seeing how much money is in the check book. Most contractors stagnate at revenue levels over $1 million because the check book method of financial management doesn’t work.

The bottom line. When you invest a little time and money into a good financial accounting system with job costing and get some one with experience to enter the data and print reports, you will be ahead of 70% of your competitors.  They don’t know when they are loosing money.  Only the strong survive in any business.  Will it be you or your competitor?  You get to decide.

Questions? Get with me. Want to add to this list? What are your thoughts?

John said that since late last fall, his banker has been very concerned about his company’s ability to make a profit by year end and now, since he hadn’t, his banker was demanding more information on a more frequent basis.  John didn’t understand what all of the fuss was about.  The company was not profitable and probably wouldn’t be profitable until the economy turn around.  John had been through these down turns before and always came out of them, what made this one different?

The story behind the story.  What John didn’t realize was his banker had been reviewing the company’s financial statements for the last 9 months and it shows that although the company had met payroll, payroll taxes and bank payments, it was getting further and further behind with its payments to its vendors.  The company lost $400,000 last year and accounts payable had increased $490,000 in the same period.  The vendors had paid for the $400,000 in losses and also picked up the $90,000 in principal payments the company had paid down on their term debt.

So why was the banker so concerned about the company’s ability to make a profit and John wasn’t so concerned.

1. John had not understood that profitability (one of the key elements of cash flow) is the grease that keeps the business running.  John feels that if he has enough determination, worked hard enough and is committed to his business, everything will work out.
2. John’s banker was more in tune with the financial viability of the company than John is.  This is a bad sign – that your banker knows more about the internal financial workings of the company than the owner does.  The banker is trained to glean minuet pieces of key information from the financial data.  John doesn’t have the background or experience to understand his financial data like his banker does.
3. John was relying more on the past than on the future.  John had been through these down turns before, they always came back and he always made it through them.  Except this time, he is more leveraged than the last down turn and this time it is taking much longer for the economy to turn around than any of the previous 20 years John has managed the company.

In this case, the banker was right to point out to John his concern about the company’s profitability.  Here are six (6) reasons why business owners need to keep their focus on profitability: Profit is the primary ingredient in cash flow (EBIDTA).  It is the “E” in EBIDTA :Cash flow generated from the business is what pays debt service on term debt: vehicles, equipment, real estate, etc.  Want to be debt free – profit is the only thing that will get you there.

• Profit is what builds equity.  Growth in equity is what enables the company to grow.  Revenue growth creates an expansion in assets which forces an increase in the other side of the balance sheet Liabilities and Equity, Liabilities expansion has limitations based on that relationship with Equity.  Want to grow your business, equity has to grow and profit is the biggest contributor to equity.

• Profit is one of the primary elements in value.  Profit has a 3 to 8 times multiplier, which adds directly to value and is the biggest contributor to a company’s value.  Thinking of exiting soon – profit will make you the most take home money.

• Profit builds working capital which enables the company to pay bills in a timely manner and take discount.

• Profit is one of the primary elements that support additional term and working capital debt.  Want to grow your business and need financing, increase your profits and financing is sure to follow.

Profit aren’t everything, they are the only thing.  Profits are critically important to every business.  John won’t be around long if he doesn’t take the steps he needs to get his company showing a profit.  His vendors are going to clamp down on allowing him purchase materials on credit.  Then the pendulum will swing the other way, COD.  No 30, 60 or 90 days to pay, it is pay in advance.  That really puts a crimp in cash flow.

Much of what I do with clients revolves around these concepts in some way. While I have always preached how critical it is to set goals and march toward them, being a sounding board, confidant, and accountability partner is just as important. If you need help in any of these areas, please contact me today!

T. Ray Phillips Testimonial from Dan Lacy on Vimeo.

There are millions of intelligent business people out there who start businesses not understanding everything they need to in order to be financially successful in the long haul. Have any questions? Let us help your business today.

One of the more significant challenges of owning a business is having enough cash to pay the bills.  Your ability to pay your bills on time, to a large effect, is based on how successful you are in collecting your accounts receivable in a timely manner.

Companies we have worked with who had problems with collecting their accounts receivable have seen dramatic improvement when they followed these few principals.  They may be just what you need to get that cash out of the bush and into your hand.

1. Implement a procedure in your organization where you or someone you appoint is systematically responsible for getting the invoices out in a timely manner. It doesn’t help cash flow if the end-of-the-month billing is not mailed until the middle of the following month. Many customers take 15 to 45 days from the date they receive the invoice to make their payment.  If you get your invoice out late, it just adds that much more time before you receive the money.
2. Always put the current date on the invoice. Many times the customers get a number of bills and they pile up until there is cash to pay them.  If your invoice is not dated, the customer assumes that they just received it and places it with the invoices just received.
3. Put the term of the sale on the invoice. The customer will probably not remember your verbal agreement or may have misplaced the written agreement.  If there is not a reminder on the invoice of when the money is due, you always end up at the end of the line.
4. Establish an accountability system for follow-up on overdue accounts receivable. If someone is not in charge, believe me, no one will take the responsibility of collecting that past due money.
5. Have your accountant or bookkeeper prepare a written aging of accounts receivable at the end of each month, so that you know what is collected and what is outstanding. This report needs to be circulated to the appropriate people at least once a month.  Increase the frequency of preparing this report and distribute it weekly if the monthly method is not effective.
6. Depending on your industry, there is normally a standard for how your customers pay their bills. If a customer exceeds that time frame, either follow up with a nice letter or a personal phone call. There is no need to get aggressive with the first contact.  In that contact, see if the customer received the invoice and if it is in their system to be paid.  Flag your calendar based on their response, and follow up (if no payment) and get another commitment for payment.  Follow this process until the account is paid in full or becomes 90 days old (or the date your have predetermined by your collection policy).  At that point, send a letter indicating that the bill will be sent to the collection agency if arrangements are not made by a specific date (usually 10 days from your current date).  If the amount is large, try to get a face to face meeting with the pay due customer.  In that meeting try to work out payment terms or a trade for product or service.  If that does not work, assign it to a local collection agency or attorney for collection.  Courtesy and consistency have worked the best for me, maybe it will for you, too.
7. If, for some reason, you want to speed up collections because you need an injection of money for a specific purpose, give a freebie. In the radio business, a station could easily give a few spots away if the customer paid their current bill within 15 days when the normal is 30 or 45 days.

Have any questions? Let me know. I’d be more than happy to sit down with you to talk about other ways we can help improve your business cash flow.

Here are Dynasty’s top five “RED FLAGS” that bankers look for that can lead to closer scrutiny of your business and possibly even a loss of the businesses borrowing ability.

1) Lack of timely financial information. One reason to not provide your financial information in a timely fashion may be that you or your CPA are busy.  However, bankers will naturally assume that there is poor financial performance being kept from them. I recommend voluntarily providing the information before being asked, even if it is going to prompt concerns. My experience shows that being proactive with the bank leads to better outcomes in the long run.

2) Lavish spending.  Whether it is on personal or business assets, owning the most expensive furniture, cars or other assets at the expense of a company’s liquidity can quickly turn a bank against a business. I have seen more relationships strained or more prospect opportunities end when it is discovered the business or business owner is highly leveraged in unnecessary spending.

3) Increasing receivables and payables. A slowdown in collecting receivables will lead to a cash flow crisis resulting in the inability to cover payables and other debts.  You can be a best in class business, offering the best products and the highest level of customer service, yet close the doors because there is no cash.  This problem can easily be spotted in the financial statements.

4) Declining deposit balances.  Some companies will have normal cycles that result in higher or lower balances during those periods.  Bankers who know their clients will spot an unusual increase or decrease in cash and ask questions.  Overdrafts on your account immediately send an undesired signal.

5) Other new bank debt.  Bankers do not like surprises.  Finding out a company has new borrowings from another bank is a major concern.  Banks occasionally check to see if any liens have been field on a company’s assets.  If a banker sees new debt they will wonder why you did not call them first and have real questions about the relationship.

One of the best methods of insuring you don’t have any RED FLAGS is to maintain a continued dialogue with your banker. A banker’s job is to spend time talking to clients and understanding their business beyond the need of the moment.  At the same time, business owners should take steps to ensure a solid relationship exists with their bank and be proactive as well.

1.   Collect your receivables. Almost every business has past-due receivables. Phone the people who owe you the most money, and try to resolve the problem on the spot. If you can’t get the cash flowing immediately, try to negotiate a payment schedule, or schedule a follow-up call.

2.   Chip away at overhead. Review “fixed” expenses, and identify those you can cut. Try this exercise: Review every canceled check for the past 90 days and decide if the expenditure was really necessary. Bad spending habits are developed when cash is plentiful.

3.    Control inventory. Inventory can be a black hole for business cash — money goes in, but it doesn’t come out until the product is sold. Take a careful look at your inventory of parts, supplies and products for sale. Sell at a discount, products that are gathering dust.  Scrap, rework, or return any other obsolete inventory.

4.    Don’t overpay estimated taxes. Many smaller businesses are allowed to pay quarterly estimates equal to either 90% of current-year or 100% of prior-year taxes. Make sure you pay the lesser amount, since that’s all the IRS requires.

5.    Review owner’s compensation. In many small businesses, the owner’s draw, salary or expense account is often a significant cash drain.  Reduce family expenditures. A little financial discipline at home may save the family business. Once you have current cash flow under control, begin to focus on long-range planning.

6.   Develop tight controls over billing and collections. To speed up cash flow, reduce the time between shipping your product and sending an invoice. Consider semi-monthly instead of monthly billing, and send second notices more quickly. Talk to your banker about ways to speed up collections; inquire about lock boxes, wire transfers, pre-authorized checks, and electronic trade payments. And don’t overlook a sure-fire, low-tech system: open your mail everyday, and deposit the checks.

7.   Plan the payment of your bills. Analyze all discounts, and refuse a discount only if the amount that you will earn on the cash by delaying payment is greater than the amount of the discount. Pay all non-discount bills as late as possible without jeopardizing your good vendor relations. Cash should be transferred from savings into your checking account at the rate necessary to cover checks. If a large amount of excess cash ends up in a low-interest account, transfer it to a higher-return account by the end of the day.

8.   Eliminate weekly paychecks. If you currently pay your employees weekly, perhaps they would be willing to accept biweekly or even monthly payment with mid-month advances.  The advantages to you: longer use of your cash and less frequent payroll tax deposits.

9.    Re-evaluate company practices. If certain customers are always late paying their bills, consider dropping them. Look for new business that will help your company’s cash flow, instead of focusing only on increased sales. Consider leasing assets rather than buying them.

10.  Look ahead. Develop a written cash flow plan and follow it. Finally, maintain an adequate line of credit and a good relationship with your banker.

You can read this article and you can do nothing, and nothing will change. But if you take action on these one by one, you will dramatic improvement in your business. I guarantee it.

Joe and Bob were two dairy farmers who each needed a milking stool.  Joe wanted a fast solution to his problem so he scrounged around his barn to find the parts to build his stool, he found a flat seat and 2 pieces of strong wood for legs; but ended up with a scrawny third leg about ½ the size of the others.  The stool worked; but Joe had to sit on his stool with tenderness in case he put too much weight on the stool breaking the smaller leg, sending Joe to the ground.  Joe’s neighbor Bob wanted to make sure he had a good, strong stool that would last a long time. He spent much more time building this stool and made sure that each component was strong – the seat and the legs. Bob’s stool was so strong he started using it as a step to store products up high on shelves. His stool never broke.

Now allow me to explain how the 3-legged stool is like a business. Let’s name the 3 primary legs or functions of a business:

1) Sales/marketing – without sales a business is dead and marketing is the precursor of revenue generation.

2) The product made or service provided by the company – if you don’t have a good service or product to provide to customers, the business is doomed.

3) Finance – money is the lubricant that keeps the business machine running – a machine that is well lubricated – will run forever with few problems.

And finally the seat – that is management, the component that keeps the 3 primary legs of the business together: sales/marketing, product or service and finance.  The better these three legs work together, the better the organization functions.

The key to this story is not to be like Joe, the cheap farmer who did not spend the time to find a third strong leg for his stool.  Joe will spend more time worrying about his stool breaking and disrupting his day than Bob.  Bob will be more efficient and productive – no worries about the foundation he sits on.

Most business owners come from the sales or product side of the business, and have little knowledge of finance – this is nearly always the weak leg in a small business. With one weak leg – the whole business is weaker because the business is only as strong as its weakest leg.  The goal of management is to make sure that all three legs are strong and durable.

In finance that means:

1) accurate and timely financial statements

2) a revenue and profit plan for the year defined monthly

3) a forward looking cash flow plan insuring adequate cash flow to run the business

4) a sound financing plan supported by a local lender(s)

5) monthly performance accountability with the managers of: sales, production/service, and finance

I have employed this system for the last fifteen years, and the results – 19 business owners have increased their person net worth by at least $1,000,000.  Think about how you can evaluate and strengthen each of the legs of your business, it will pay you back a hundred fold.

Here is something I am going to give you today for FREE. If you follow it, it can improve your bottom line and show you 127 ways to cut your costs in business. Go to www.dynastybuilder.com and click on the picture to receive your copy today!