Protecting your company’s cash position and cash flow is critical to survival. The old adage that “CASH IS KING” is still true today. In today’s economy where uncertainty is rampant, many businesses are having problems just staying alive, let alone growing. The outlook for the economy rebounding over the next two years isn’t that optimistic either. The Wall Street Journal, Wells Fargo Bank and the University of Michigan are all predicting modest growth for the next 2 years: 2.1% in 2010 and 3.2% in 2011.
WHAT DO YOU DO? Here are 6 steps you can take that will have immediate and positive impact on your ability to maintain positive cash flow:
- Profitability - This is the most important – your company MUST be profitable. Look at your last three months profit and loss statements. If you are making money, your chances of maintaining a positive cash position are very good. If you are losing money – your chances of survival diminishes with each month that you show a loss. The reason: losses deplete your cash position and each month you lose money, your cash position (and cash flow) deteriorates. Lose money long enough and you will not have enough money to make payroll and/or purchase inventory for future sales.
- Revenue - develop a game plan to improve revenue. Pull out all the stops: Ask your sales people to commit more time, ask them to make more calls, ask for more work, quote more jobs, see more people and get better connected with customers. Start measuring weekly what is important in your sales area and review the data. You’ll be shocked at what you learn. Also, selling is about building relationships; if your sales people are not doing that, your competition is.
- Accounts Receivable -improve your collections:
- Review you’re A/R report weekly
- Read the notes on each account that is over 45 days old on what is being done, promises made, etc. Get informed on who is paying slowly.
- Get out in the market and talk to your customers that are slow – see what is going on.
- Invoice weekly instead of monthly
- Fax or email each invoice – don’t rely on snail mail
- New customers – get a deposit on the new job
- Get yourself and your employees involved in collecting past due amounts
- On slow accounts – consistency is the key
- Track the percentage of receivables over 60, 90 and 120 monthly, the amount of money over terms should decrease – if not, ACT
- Inventory – less is better. Inventory is not cash and the less you have to stock the better. Work out a plan with your supplier to see if they can deliver more often, convert your old inventory to cash (especially if it is old, even at a discount), and measure your current inventory level against your current revenue level – you probably have too much inventory on hand.
- Borrowing - make sure that you have maximized this ability. If you can restructure or refinance some existing long-term assets at today’s low rates, you should jump at it. Although credit is harder to get than it was 18 months ago, there are still lenders out there looking to lend money. Exhaust this ability by putting together a good business plan with your company’s last 2 years performance and start looking. Ford Motor Company went out and re-leveraged their key assets and built their cash up before the economic downturn – they are the only car company that didn’t need government money.
- Accounts Payable – more is better. Although suppliers are also tightening up on credit policies, you can normally leverage this relationship for longer terms on repayment. If you’re in trouble with your suppliers already, talk to them and show them a plan as to how they will be repaid and how they are going to make more money in your account by selling you more product. But don’t make any promise you can’t keep on repayment because that will hurt you in the long run.
Over the last 35 years, I have worked with hundreds of businesses. Successful businesses do the things I have outlined in this article. If you’re not doing them, you are lessening your chance of succeeding as a business owner – which may end up feeling like a sharp stick in the eye. If you do them, your chances dramatically improve, and the pain goes away. If you need help, some direction, or a complete plan of action, call me today – 765-644-8887. An initial meeting costs you nothing and can help get you on the right track.
