Up Your Cash!

To continue the cash flow discussion from last week.  Predicting cash flow is one of the most difficult thing small and medium size company do.  Last week we looked at a tool which can dramatically help predicting cash flow – the 13 Week Cash Flow Worksheet.  I hope you put this tool to use and continue using it on a weekly basis. 

Now, the question is – how can I improve my business’ cash flow?

There are many techniques and strategies to improve cash flow and many are dependent on your business.  The following are 7 best ways to Up Your Cash:

1. Negotiate better terms with your vendors – payment terms of 40 days vs. 30 days significantly enhances cash flow – a business with vendor related costs of $14mm that extends the average days to pay from 30 to 40 days enhances cash flow by $400,000!
2. Get some cash down up front - This is a great way to have your clients fund projects - not you. 
3. Be careful with your payment terms with customers – balance due on completion is much better than 30 day terms.  If you do extend credit terms, be diligent in your collection practices.  Even slight improvements in day’s sales outstanding (DSO) can be a significant enhancement to cash flow.  If you are a $20mm business with $2.2mm in accounts receivable, a 5-day improvement means a $274,000 incremental increase in cash flow.  Ensure you invoice your customers quickly and develop a credit management strategy and process focuses on reducing DSO.  I recently worked with a client that took a week to invoice their customers.  Employing a couple simple strategies (immediate invoicing, emailing/faxing invoices vs. mailing, and accepting ACH payments vs. customer checks) improved cash flow by over $200,000.  Simple and effective.
4. Manage your inventory better – the same principal as DSO and average days to pay applies to days of inventory on hand.  Any improvement here has serious implications to improve cash flow.
5. Watch your operating expenses.  For most businesses, the most significant operating expense is payroll and payroll related cost, but carefully watching all expenses is imperative.  Any improvement directly enhances cash flow.
6. Use a line of credit at the bank to plug any shortfall of cash flow and allow you to take advantage of vendor programs. Remember taking advantage of quick pay discounts is an excellent way to leverage your cash flow to enhance profitability.  Taking advantage of a 2%10, net 30 discount returns approximately 37% – so it may make sense to tap your line of credit occasionally to take advantage of the vendor discount. 
   
   
   Use the following formula to calculate the cost of not taking a discount.
   
   
   Cost of failing =          Discount %                   X   360
   to take discount          100% - Discount %       Final due date - Discount period
   
   
   So, in the 2%10, net 30 example above the calculation looks like this: .02/.98x360/20 = 37%.  That’s a lot to give up by paying in 30 days instead of 10.
7. Watch what you take out of the business.  Shareholders use the business to pay business related and other expenses, but anything you take out directly reduces cash.

Additional cash generated by using the above techniques can be used to grow the business, to paydown debt, or to take advantage of quick pay vendor discounts.  

Well, have a great Easter, and I hope you are able to spend some time with your family.

And as always – Think Cash Flow!

/jon

News Diet for Me

I was riding my bike on the trainer this morning and flipped on television - something I usually don’t do.  I usually watch a Netflix show or listen to a podcast.  But this morning, I watched the morning news programs.

All the news was all extremely emotional, tragic and sad.  

A Korean ferry capsized with 300 missing high school students, 12 people were killed on Mt Everest, some asshole shooting people in Kansas City was arrested, Ukraine and Russia are getting ready to battle, etc, etc, etc.  (The only good news was a piece I saw was on the 50th anniversary of a Ford Mustang).  The rest of the stories were horrible and personally stressful.  

And there was absolutely nothing I could do to change what happened.

There should be a ‘good news’ news program.

I've concluded that I am going on news diet – starting today.  Why should I stress myself out with all this negativity and overwhelmingly sad stories when there is absolutely nothing I can do about most of it?

I’m just going to put my head in the sand for a while and concentrate on things I can impact – like my health, my relationships, my productively, and my business.  

That seems to make more sense than spending any time focusing on other problems that really don’t impact me and where I cannot help.

Forecasting Cash Flow

Predicting and managing cash can be one of the most difficult things small businesses do. 

If your company is growing, it’s extremely important; we all have seen many growing companies run out of cash due to growing accounts receivable and inventory.  And if your company is not making money, it’s obviously extremely important watching every dollar.  We need to make payroll and keep the business operating.

I like to put in place two process tools that really help any business predict and manage their cash.  The first tool which is essential for most small businesses is to put in place the 13 Week Cash Flow worksheet.  This should be updated, reviewed and revised every week.

The worksheet is simple – it has weekly forecasts for cash receipts and cash disbursements.  The trick twofold:

·        Being able to predict the timing cash receipts

·        Having place holders for planned disbursements

Predicting Cash Receipts

In smaller companies, detail expected payments for all outstanding invoices.  In the most companies, however, due to the size of receivable aging, assumptions must be made based on current expected cash conversion.  Accounts receivable turnover is measured on a weekly basis and strategies are developed and implemented to make improvements.  Small improvements in accounts receivable turnover as a dramatic effect on cash flow. (For example, a $10,000,000 parts distributor with $1,500,000 in accounts receivable, decreasing accounts receivable on average of days 5 days, increases cash approximately $139,000.)

Disbursements

The worksheet needs to contain placeholders for everything.  Bi-weekly payroll, benefits, rent, debt payments, operating and admin expenses, A/P, inventory purchases, cap ex, debt and other payments.  No surprises. 

Each week, review the prior week’s worksheet with actual receipts and disbursements, and recast the next 13 weeks. 

The process is straight forward and over time you get better at your predictions.  Forecasting cash flow in your business makes life much better.  Less stress, more predictability, ability to make commitments, etc. 

See the example of a 13 Week Cash Flow worksheet.

The 2^nd tool is an Operating Plan forecasting the basic financial statements: balance sheet, income statement and statement of cash flow.  The Operating Plan uses some key business drivers as its base. 

I’ll discuss this in more detail later.

As always – Think Profit and Think Cash Flow!

/jon