How to manage cash flow when cash is short. Cash is tight. Makes it hard to plan the next three to four months. We’ve been making money, so I don’t understand. And I’m worried about what comes next, in case we lose money in our slow period. On top of everything, we have three payrolls in one month coming up soon. How do I get out of trouble?
Thoughts of the Day: Manage cash flow by looking at the financial picture to figure out how the business is doing. Use credit lines properly. Be disciplined about managing the situation. Sell your way out of the problem the right way.
Manage cash flow so your business stays afloat
Pull together information from both the income statement and the balance sheet. In order to have a good handle on cash flow, you need to accurately forecast when business is coming in, when you will get paid by customers, losses that could happen, and what bills you have to pay.
One of the big problems with seasonal businesses is that as the business ramps up, cash dries up. You have to pay for field labor to do work ahead of getting paid. You may have to lay out equipment and materials ahead of payment, as well. Get advance payments from customers to help cover early cash outlays.
Collect receivables quickly
Keep track of what customers have paid and still owe by using the accrual function in your accounting system. Compare projected and actual profit by customer. Research what went wrong with the customers that looked profitable and turned out not to be. Don’t wait until the end of the job to throw extra costs at the customer. Negotiate with the customer throughout the period of time you’re working together to make sure you’re both on the same page.
When things slow down, get the credit line paid down. Put money away in savings. Resist the temptation to overspend because there’s extra cash on hand.
Credit lines should only be used to cover ramp-up costs and expenditures to support growth. Drawing down on a credit line to pay regular monthly bills is a bad idea. Make sure you have enough gross profit to keep your office open all year round.
Negotiate with the bank for increases to the credit line when you have cash on hand and are coming off a profitable year. The bank is not an investor, so don’t expect the bank to bail you out when times are tough. Plan ahead and make sure you have a cash and credit cushion in place before you need it.
Actively managing accounts receivable
Sometimes owners stop looking at the books because they don’t want to deal with the problems. That’s foolish. The truth is often not nearly as bad as what’s imagined. And it’s only by getting to the bottom of what’s going on that you’re going to be able to figure out how to dig out of a problem.
Set up weekly reviews of all financial reports. Establish key measures to track. Suggestions for weekly reports include new invoices, payroll, hours on the job, hours of work on hand, customer backlog, and revenue.
When things get really tight, look at your costs and what can be done to boost the most profitable sales. Make sure that you’re profitable by tracking costs of goods sold and comparing that to revenue. That will help to cover overhead costs.
Looking for a good book? Try “Fundamentals of Credit and Credit Analysis” by Arnold Ziegel.
