One of the biggest challenges of the small business owner is managing cash flow for funding current operations, business expansion and the preverbal ‘rainy day fund’. Nine out of ten clients I talk to have no cash for emergencies. The business works strictly from a ‘cash-flow’ standpoint and relies on its customers to pay its bills timely in order to meet payroll, vendor and Overhead obligations.
The DAILY run to the mailbox chasing accounts receivables to get money in, only to see it go right back out again. Most small business owners feel like they are on a treadmill that often never makes progress. Many sleepless nights and thoughts of…how do we get out of this month-to-month hole.
Fact: In a joint report that included statistics from the first quarter of 2013, research firms Experian and Moody Analytics found that businesses of every size were increasing the average number of day’s invoices were paid beyond terms. Nationwide, the greatest increases were among businesses with 1,000 or more employees or those with nine or less.
While the challenges are tough, it is further complicated as small business are typically hard to fund through conventional means, making growth a double edged-sword. Working through cash-flow demands takes both a plan and a large dose of patience. It is imperative that you know both your needs and goals. Being honest with your vendors and negotiating extended payment terms in return for a potentially bigger piece of the pie is always a great start as materials are often your biggest cost after payroll.
Building cash reserves are essential to sustaining a healthy business environment.
While every business needs cash for meeting its daily, weekly and monthly obligations, cash reserves to function effectively when things get tight are imperative. When sales are down, cash reserves often become the funding source to sustain the business. It takes real discipline to protect cash reserves. Set a minimum goal and protect those reserves at all costs, even if the temptation is to use them up to pay bills.
1. Possible Solution; the 3% account… When I was in business I established what I called a 3% account. This account was nothing more than a savings account where 3% came off every receivable collected. This money was put into an account that was not touched. I maintained good discipline based on understanding that one day I might need this money. Let us think about it this way, if you are a $600k a year business the 3% is $ 18,000.00 per year. Now think about if you are a million dollar company that is $ 36,000.00 a year. While it might sound like a lot of hard work to do, let us break it down further. In 2014, there are 251 working days; using the $600k in sales that averages $ 71.71 a day. Most company’s waste 3x that a day in unproductive time or wasted overhead expense. The moral of my story is, if you have the right mindset and discipline you will not really notice the 3% set aside until the point you need the money, to perhaps bridge a week of payroll.
Set goals that will keep your business healthy. For example, keep one month worth of cash on hand at all times. Build up cash reserves for up to three months of overhead expenses. Then build to six months of overhead expenses sitting in cash or cash equivalents. Once you get to this kind of savings, you will be able to sleep at night and your business will be moving forward in the right direction.
Always remember; be honest with yourself and those you work with. If you do not have enough cash to pay obligations, approach vendors who have a stake in your success. These are most often your cost of goods sold vendors. Ask them for extended terms. If you have a balance built up with them, negotiate pay-down terms on the old balance. Many vendors would rather see you stay in business and continue to buy their products and services, so long as they can be confident that they will not be burned.
Take a close look at what volume of sales your company needs to be profitable. Is the current cash-flow issue coming from a couple of down months or is the business trending downward overall? Is this a seasonal problem, requiring a different sales strategy to plug volume into the low months?
Face the music by putting together a plan for how to move forward. If you do not know how to write a financial projection or cash flow budget, get someone to help you. While ‘cash is king’, knowledge and up to date financial information is one of the most important tools you can have.
Looking for a good book on the subject, suggested reading;
- The Visionary Leader: How to inspire success from the top down.
- Susan Bagyura (Author), Michael E. Gerber (Foreword), Fiona Dempsey (Illustrator)