Improving Your Cash Flow

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Magnifying glassOne way to see how your business is doing is to look at your cash flow and find ways to improve it.  Cash flow is simply the amount of money you have left after operational, depreciation of assets, and investing activities.  A good cash flow is a key indicator of a successful and growing business.  Cash flow generates the money to support the business, pay creditors and provides funds for the owner to reinvest in his/her business.  If you do not have a good cash flow, you may have to borrow funds to support your business operations.  If a business cannot sustain a positive cash flow it will not survive.

 Here is a good example of poor cash flow management.  Early in my career, I was responsible for leasing all of the office and laboratory space for the research and development company I worked for.  We had nearly 500,000 square feet under lease from a single company at a cost of over $5 million per year.  I had inherited the leases from the contracts manager and was negotiating leases for several new buildings.  The owner hired a retired leasing agent to advise him on leasing and why he was not making any money on the leases.  One of the first things he did was look at the receivables outstanding.  He called a meeting with me and asked me why we had not paid our lease for two of the buildings the previous last year.  I told him I would check and called our accounts payable manager.  “Oh”, he said, “it’s real simple, they have never invoiced us!  We only pay on invoices submitted.”  I told the manager who turned white and said he would fix that.  I got an invoice that afternoon hand delivered for $3,000,000 (which we promptly paid).  What was amazing to me was that he had never missed the money, because his cash flow was so good from other leases and operations and that he had been so lax that he had not stayed on top of his receivables.

Using this example, here are two easy ways to increase your cash flow.  First, make sure that you collect the money owed you.  You can do this several ways- collect up front before work begins (best); take a down payment and collect periodic payments based on work accomplished or on a set amount per month; or collect at the end of the work (least desirable).  Second, once you have billed, make sure that you are paid within the stipulated time period.  What are some other ways to you can improve your cash flow. 

One easy way is to get paid earlier.  When I worked for a large aerospace company, cash flow became a key indicator for the company and its stock price so we all worked hard to improve it. One way we did that was to negotiate performance parameters so that we could invoice as specific goals were delivered.  This allowed us to bill as we performed work rather than billing one a month.  

Another way to improve cash flow is to be very prompt with a client if a payment is late.  Don’t wait.  A phone call followed up by an email to them asking about the payment should be done the day the payment is due.  If you have a slow payer, then you should send them a reminder several days in advance of the due date so they have no excuse for being late.  If they cannot pay in full, negotiate a  payment plan with them.

 Improving your cash flow is an important part of your business.  One thing that I did not mention in the leasing example is that the build owner was using a line of credit (and paying interest) to finance his operations.  This was money poorly spent since he could have been financing it from his ample cash flow with out costing him a dime.  Would you want to incur credit costs in order to finance your client’s slow payments?  Of course not! Take a good look at your cash flow and see if there are ways you can improve it.  Remember, it goes to your bottom line.  Need help finding other ways to improve your cash flow?  Business Negotiation Services can help you collect on past-due receivables.  Contact me at bill@businessnegotiationservices.com for a free consultation.

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Comments

  1. Very good suggestions for improving cash flow. I am a big believer in paying up front, and having it be automatic when it is a payment plan. This way, no one has to remember anything, the computers do all the work 🙂
    And I imagine your comment will be… computers make mistakes so be sure to check that all of your automatic billing is accurate each month… and I do.

  2. Great advice, Bill. I have MANY clients who just about refuse to watch their cash flow. But a head in the sand ends up not only being gritty, but also being broke.

  3. Bill – These are great solutions to improve cash flow! The best change I made in my business was moving all of our clients to credit card billing and automatic payment plans. While pay in full is always nice, I LOVE payment plans because it stretches out the cash flow 🙂

  4. Bill, I always seek 50 percent up front on work of any significance for just the reasons you name. Thanks for the excellent insights although I am puzzled as to how one fails to miss $3 million!

  5. Great tips Bill. I have recently moved many of our corporate clients to paying for different phases of work we do for them rather that upon completion as it staggers the payment and helps out our cashflow tremendously.

  6. Great tips, Bill. I love automatic bill payments. It really helps in improving cashflow and making sure bills are paid on time. Also, I can’t believe they didn’t miss 3 million dollars–wow!

  7. All great information! in my business my clients pay for a program up front and this is great for my cash flow . I can’t believe they didn’t miss 3 million dollars!

    • He ran his office leasing business just like his used car lot business. No checks and balances and no delegation.

  8. It always is a shock to me how people work and do not confirm they are being paid for their work.
    This goes across the board from a larger business to the small business owner. Your example speaks volumes on the subject.

  9. You can even call a client before their payment is due with a gentle reminder that their bill is due soon. You can call the client about 5 days before the bill is due and treat it like a “courtesy call.” “Hi, we’re just checking in, want to make sure everything is okay” and then remind them of the upcoming payment. If you’re lucky, they may pay you right then and there over the phone.

  10. Timing can be so important for a small business. For example, when you make a sale to a credit customer, you recognize that sale immediately on your income statement. That’s called accrual accounting . However, you don’t get the money immediately. On your cash budget and your statement of cash flows , you don’t show that credit transaction until you actually receive payment.

    • True, that’s why you want to collect as quickly as you can since you are out the inventory/service until the cash does come in.

  11. Poor financial management is one of the major causes of the failure of small businesses. Many small firms go out of business because of inadequate working capital and poor cash flow management.

    • Amazing how people brag about their gross sales and don’t have a clue on their actual profit until they go under or forget to set aside money for quarterly income tax payments.

  12. Example: Starbucks used to just sell hot coffee. The problem with that is that it too is a seasonal business – coffee sales go down in the summer. So Starbucks created additional profit centers – slushy Frappuccino, CDs, food, etc. By having more ways to make money than just hot coffee sales, Starbucks created steady cash flow.