One 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 firstname.lastname@example.org for a free consultation.