Cash flow, or more accurately the lack of cash flow, is the most common business problem. It happens to business, large and small, and, more often than not, can be prevented or at least minimized.
Merriam-Webster.com defines cash flow as the movement of money in and out of a business. What is often left unsaid when reading such definitions is that cash usually flows out of a business before it flows in. When more flows out than in, that is called a cash flow crunch.
The time to solve a cash-flow crunch is before it happens. Bankers tell an endless variety of stories about business owners who ask in the morning for a loan needed to pay a bill due that afternoon. The owner did not realize he or she was short of cash until that very day. Needless to say, bankers are not impressed by owners who fail to plan their need for cash.
The moral here is to use a cash-flow planning tool. It can be as simple as entries on a calendar noting when a client is expected to pay and when the payroll or phone bill is due. It can be as complex as a sophisticated spreadsheet with dozens of lines of projected income and outflow. Many popular accounting software programs such as QuickBooks have the ability to project cash flow.
A common problem, especially for service businesses, is assuming income will come in evenly throughout the year. This is seldom the case. Most businesses have slow income periods or cash gaps. For smaller businesses, cash gaps often occur when the owner or the customers go on vacation. Being aware of this situation and building up a cash kitty will tide a business over the gap.
I recently read an important piece of advice: “Don’t let your clients affect your cash flow.” A business friend used to say he worked hard to make sure his customers’ problems did not become his problems. Implicit in both statements is the core idea that you must protect your business by doing everything possible to bring in money due you, regardless of the reason or excuse your customer offers as a reason to pay you later. Nowhere is the term “cash-flow management” more important than when applied to managing your customers.
A firm designed advertising plans and required final payment when their customer implemented the plan. This often led to delayed payment because the customer might put off implementation for weeks or even months.
They made the mistake of tying final payment to a client responsibility. You should get paid when you complete your work, regardless of when the customer actually takes action. Be sure to put that in writing in your contract or engagement letter.
You do require a deposit or down payment before you begin work on a project, don’t you? You do require regular monthly payments rather than allowing for a large balloon payment at the end of a project, don’t you? You do stop work when your client falls behind on payments, don’t you? Unfortunately, many businesses follow none of these sound practices. If you are among them, why not implement them immediately and see the positive effect on your cash flow.
Give thought to these and other ways to improve your cash flow. Your business may well depend on it.
Bowser@BusinessValueInsights.com. Dan Bowser is president of Value Insights Inc. of Durango, Chandler, Ariz. and Summerville, Pa.
