Put the spark back in your business…with cash flow…really!

CASH CYCLE: (BALANCE SHEET)

The Cash Cycle is a snapshot of cash and cash equivalents all through your business. It will help you understand where your working capital is used.

1. Analyze your sales and order fulfillment process from start to finish
2. Map all the places where orders are converted to cash
3. Examples: Bookings, Order Backlog, Finished Inventory, Invoicing, A/R
4. One-time changes to increase cash on hand.   Measure, then fix:
   1. Reduce inventory; Use or sell raw material and WIP (Finished Goods?)
   2. Invoice the customer faster; improve workflow and communication with accounting
   3. Reduce Receivables; improve the collection process
   4. Increase Payables; pay vendors on a strict schedule
5. Chart progress.

Put the Spark Back into Your Business:

Entrepreneurs are an odd lot.  We pursue a passion but end up with a business. Sure, launching a company seems like a good idea at first. We start with stars in our eyes, but end up married to the dreary demands of running a company.

If your business is not helping you pursue your dreams – by generating both income and opportunity for you to do what you love – then it’s time for a bit of “Couple’s Therapy”.  Just you and your business.  Communicating, listening and finally coming to a resolution that empowers you both to grow and thrive.

So how do you hear what your business is saying?  Just keep reading.

First Clear Away the Cobwebs

Every relationship gets a bit stale if you allow the junk to pile up, the routines to become ruts, or the future to get foggy.  Start with a clean slate by streamlining your operations and getting a better view of the future.

Focus on Cash Flow

The first goal is to reduce the work required of you on a daily basis and to give yourself a clearer view of your financial future. Too many entrepreneurs get their heads stuck in their bookkeeping.  If you (or your staff) are spending more than a few hours a week keeping books, issuing invoices, collecting debt and other accounting work, there’s likely an opportunity to reduce time and redundancy — all while improving reporting of key management data.

• Start by writing down each step that you take from the time you shake hands with a customer until his money is in the bank.  Are you recording information about this customer in more than one place?  Are you using a CRM system (like ACT! or Nutshell) and also putting the data into a project management package and then later entering it into QuickBooks  so you can do billing?  Look for opportunities to consolidate several processes into one. Make the paperwork as simple as possible.  (Tip: QuickBooks has some great management tools built-in, some that are add-on apps and some that are separate, but integrate seamlessly, like the online CRM package called “Driven“). If you can’t see the complexity, try explaining your process to an outsider. If it takes more than 2 minutes, you’ve got room for improvement.
• Once you know all the steps before money lands in the bank, make a money timeline.  How many days or weeks does it take for that money to be available to you?  And how much do you need in the meantime to service the customer and keep the doors open?  Put these cash flows on a simple calendar or cash flow spreadsheet to project how much cash you will have on hand at the end of each day or week.  You are looking, of course, for those days during the month when the cash is dangerously low — or below zero!  Decide now how you will delay spending or speed up collections to get that money flowing in the right direction.
• Now you know what happens and when… take the final step by measuring “how much” of your money is stuck at each step.  Make a big, simple paper dashboard for yourself. (Tip: follow the link for an example.) Each week or month take a moment to measure how much money is at each step of your pipeline (all the way from pre-sales to new contracts to billed, collected and in-the-bank.)  With good reliable book keeping, you can do endless reporting of course, but this may be the one and only report you need to keep your finger on the pulse of the company.

By the time you tape my dashboard to your wall, you should be taking a deep breath and saying “Yes, this is where I am and where I’m headed.”  It may not be a pretty picture, but you will, at least, have a clear understanding of the facts.  And no relationship can be improved until you listen closely to the facts.

Working Capital Woes? To find the Problems, Map your Cash Conversion Cycle

At some point, every business owner feels it. It starts with a tightening of the chest. Then there’s the ache in the pit of your stomach. And a fuzzy feeling in your head.

Why? It’s almost payday and you’re short on cash.

First, breathe. Stressing out won’t put cash in the bank. Now, when you can see clearly, let’s get started fixing the problem: Ask yourself this one simple question.

Where is the cash right now?

To get the cash, you have to know where it is now. I’m betting its in one of the following three places:

Too much inventory

Old invoices

A large order that isn’t ready yet

Maybe you have cash in several or all of these places. Great! Getting the cash into your bank starts with mapping your “cash cycle“.

What? How do I “Map my cash cycle”?

Every business has a cash cycle: We buy inventory from vendors; Send invoices to customer; Collect cash from customers…. and then starts buying more inventory again. Wash, rinse and repeat.

The trick is to make the cycle turn as fast as possible…To minimize the cash that gets “stuck” in places like inventory and invoices.   The faster the cycle spins, the faster you can begin to accumulate profits.

To “Push” the cycle, you’ll have to take personal responsibility for a few things:

Call your delinquent customers. Then call the ones that are NOT delinquent. Don’t get angry, just tell them that you would like to “schedule their payment”.   Tell customers that you’re offering a 2% discount for prompt payment this month. Or a free gift. Or $10 off their next order. Use this as an opportunity to bond with your customers, not to scold them!

While you are on the phone with customers, tell them you have some excess inventory and are “blowing out some over-stocks”. If you’ve got excess inventory, now’s a good time to whittle that down and turn it into some quick cash. Resolve not to buy more inventory than you need.

If it’s a large order that’s got you down, try a variation on #1… call the new customer and offer a discount or gift for a partial PRE-payment. Nobody wants to pay 100% up front, but asking for 30% or even 50% is reasonable in most businesses. Be frank. Tell the customer that you’d like to do a great job for him… and have plenty of _____ (staff / equipment / inventory / parts) on hand for his important job. Explain that his large job makes him an important customer, and you appreciate his business. Don’t say “times are tough” or “cash is tight”. No body wants to save your skin. But they do want great service and a good working relationship with their vendors (that’s you).

What if none of this applies to you? If you do not have overdue AR or lots of inventory, visit some of my other blog posts to learn what it takes to get a bank loan (or find some hidden wealth). And finally, take a hard look at the problem… what can you do to avoid this situation next time? Read my book to find some of the key ratios you should be watching to avoid a cash flow crunch.

Cash When You Need it Most: How to Use Your Customers Credit to Borrow Money Now

Employees won’t wait for payroll and landlords don’t want to hear about your cash flow when rent is due. Sure, cash is a problem. But if you have Accounts Receivable, you already have the keys to unlocking more cash. Here’s how you can get the cash when you need it the most:

The Root Cause

The biggest cash problems are caused when we send expensive goods or services to our customers, and then give them 30 days to pay. Yes, it is just good business to offer your customers a bit of credit… but when 30 days turns into 45, 60 or even 90 days? Well, now you’re just lending your customers a bunch of money — and if you’ve lent it to them, you don’t have it to use yourself. Meanwhile payroll is due, the rent is late and baby needs new shoes.

Fine you say, “I’ll call the customer and make him pay!” Good luck. The best customers know they have power over you. If you want their business, you’ll get your payment in 60 days. No exceptions. Giant companies like Walmart, GE and the Federal Government are famous for holding up payments. They always pay their bills … but they always pay their bills late. Calling to rattle their chains is just as likely to make them mad as to make them pay.

Take Collections to Zero

If you’ve followed this blog for long, you probably know that you can calculate the average time it takes to collect an invoice. The math is easy, so grab your financial statements and do this now: Divide Accounts receivable by Annual Sales. Now multiply by 365. The result is the number of days that your customers are using your money. (Read about the cash conversion cycle for more.) The ideal result is ZERO: if your average collection days goes to zero, the money currently in Accounts Receivable will instead be sitting happily in your bank account.

AVERAGE COLLECTION DAYS = (Accounts Receivable / Annual Sales) * 365

If this is any number greater than zero, you have an opportunity to improve your cash flow by collecting faster… or by using your Accounts Receivable to do what is called “Accounts Receivable Financing“.

What is Accounts Receivable Financing?

First, it’s not new. Its not scary. And its not terribly expensive when done right. Accounts Receivable Financing is common and includes various ways to borrow against the value locked up in your Accounts Receivable (A/R).

A/R Financing includes factoring and invoice finance (plus “trade payables“, which is an interesting twist on the same concept).

In brief, you allow a bank or finance company to hold and collect your Accounts Receivable in exchange for an upfront payment or loan. The lender helps you take your Average Collection Days down closer to zero, and charges a small fraction of the invoice value for the service. There are variations: some lenders collect from the client directly, others do not; some will pay you everything up front, others will wait until the client pays before making a final “rebate” payment to you. Contracts are generally straight forward and with a little practice the process becomes quite simple.

Like most things, A/R financing has even been web-ified. New websites, like CBAC Funding, are popping up to help business owners find and broker deals between various A/R finance companies. Using an intermediary makes the whole process easier and safer. Much like using a mortgage broker, an A/R finance broker can get you several bids from various lenders from a single simple application process. Other sites, like The Receivables Exchange, help you take a more “Do It Yourself” approach.

But the coolest part of AR Finance is that the credit is not based on your credit, but on the credit of your customers. You are actually borrowing money by using your customers’ credit! If you’re doing business with WalMart, GE or the government this is a no-brainer. Smaller customers will qualify too, though the fees or discount rate (equivalent to the interest rate on a loan) will be a bit higher.

Unlock A/R for Better Cash Flow

If you ask a couple of old-timers (like me) about factoring, you’re likely to hear a few horror stories. AR Finance used to be the wild west of lending. But today’s finance companies are more professional and more efficient than ever. Its not the cheapest loan you’ll ever get (many companies keep up to 5% of the invoice value), but it may be the easiest and fastest way to unlock the value of your A/R.

Remember: You are in control. If you don’t need the money this month, don’t give the lender the invoice. And if you have customers that are not so credit worthy, you can exclude them from the deal (which can help you get a better rate).

Like all finance deals, get several quotes and read the fine print carefully. An intermediary, broker, website or CFO advisor can help sort the wheat from the chaff.

Helping you attain your goals, one week at a time…

Steve Milan

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Interested in learning how FUSE can help you with your bookkeeping and accounting? Take a look at our video to learn more.