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It was reported in the presidential election of 1992, that James Carville, Bill Clinton?s campaign manager had a sign posted in their Little Rock Office that simple stated “It?s the economy, stupid”. This was a reminder to everyone that worked at the campaign that the only thing that the race was about was the economy. The campaign should focus on this one point. That year, I started my third business after failing in two others. This time, I scrawled my own sign and tacked it up in my office so it read “It?s cash flow, stupid”. It became my daily mantra.
Starting out in my first business in 1980’s, I thought that the only thing that mattered was to sell your product. I reasoned that if you make sales, you make money. This worked great until customers didn?t pay me on time or at the same rate as my business expenses grew. Even if my customers did not pay their bills when they were due, my employees and vendors still wanted to get paid on time. My employees were not very interested in taking my accounts receivables in trade for their salaries or promises that I would pay them in a few weeks. What I realized is that sales do not pay bills. What your income statement says about profits in your small business can be meaningless. We have all read this past year how Enron and Worldcom misstated their income statements and balance sheets to make their companies seem profitable. Only collecting the cash from sales in a business means something. Cash is the gasoline that makes your business engine work. Without cash, your business literally suffocates. Cash is not only king, but it is every other face card in the deck. Most businesses fail because they run out of cash leaked through losses or other poor management practices. Cash shortages have driven Divine and United Airlines into bankruptcy.
There are many things to do to improve your cash flow in your own business. First, have your accountant or your bookkeeper construct a cash flow statement for you monthly. Most basic accounting software packages have a standard report that will produce it in its most basic form. Learn what every positive and negative number on the statement means. Unfortunately like me, most business owners utilize this tool only after they run into cash flow problems.
In financial terms, cash flow is defined as cash receipts minus cash payments received over a given period of time. It’s really the flow of money in and out of your business. It is this rate of cash inflows and cash outflows that essentially determine your business’ health.
There are many knobs you can turn to improve your cash flow. Collecting your receivables faster or getting extended credit from your vendors will boost your cash. Selling inventory faster and keeping your inventory levels lower will also accomplish the same thing. Buying inventory only to sit for months on your shelf waiting for customer orders can take a lot of cash out of the business.
Other ideas to bring more cash in your business are:
- Get your customers to pay with credit cards. This way, you get money you can use in your checking account the next day.
- Give customers discounts for paying their bills sooner. With interest rates low, you may offer a half percent discount for paying within 10 days.
- Ask customers to pay a deposit or an advance for services before you perform it. This is industry practice in consulting companies.
- If practical, bill your customers as soon as you perform the service or deliver the product. Don’t wait until the end of the month to send them a statement.
- Be diligent about collecting your accounts receivables. State a specific date that the payment is due. Call soon after the bill is sent out to make sure they received it and ask when it will be paid. Follow up early and often. You have a right to be paid within terms, so don’t be timid about asking for your money.
- Alternately, try to get 60 or 90 day terms in which to pay your bills.
- If your vendors allow it, pay your own bills after 30 days with credit cards. This gives you 30 more days to pay until your credit card bill comes due.
- Track your inventory carefully. Know what sells quickly and what never moves off the shelf. Know how long your customer will wait for a product and still be satisfied.
Finally, remember that a real customer is only one that pays their bill in the agreed timeframe. Don’t extend credit to a customer that has not proven they can pay in a timely fashion. My good friend always reminds me that a business transaction isn’t really complete “until the check clears the bank!”. In the long run, it only makes business sense to sell something to a customer that you know will pay you. Doing work for a customer where you question if you?ll ever get paid is not a sustainable business model. It is much better not to have done that work at all and instead, spend your time finding real paying customers.