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

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.