Addressing our cash flow issue—help!

Dear Ken Keller,

Summer is here and my cash flow is suffering. It happens every year at this time but never plan for it. I’d like to kick myself I am so angry about letting it take place again—I should know better. What do you recommend to change things quickly? — Cindy M.

Dear Cindy,

There are a number of things you can do to improve cash flow; some actions will yield immediate results and some you won’t see for a few months. But, if you have and can keep the mindset to reduce outgo and improve income, you will be moving towards continuous improvement which should be your goal.

You did not mention your industry so my suggestions and ideas will be generic and you can adjust and adapt for your specific business.

The ultimate objective for you to better anticipate cash flow is to create a thirteen week cash flow forecast that you update weekly.

I recommend you start by making a list of all accounts receivable, ranked by days outstanding or how long it has been owed. If you don’t have a formal collections policy, you need to create one and understand that someone in your organization has to own the responsibility for collecting what is owed with the goal of having an what you consider to be an acceptable AR number at any point in time.

Second, look at your current expenses and determine who must be paid and by what date, versus those that are more flexible. For example, you must pay the utility bill or you lose power on a certain date but along term supplier will understand you paying that invoice a week later than normal.

Third, look through the company checking account statements and look for items that are not essential spending. Over time, in even the best managed companies, things are bought as the business grows and when more cash comes in, it gets spent on the “wants.” Wants are often impulse purchases with monthly payments and pretty soon you are paying for things no one uses.

Fourth, consider bringing in an expense reduction consultant who will analyze spending on various costs and will share in the savings if they can negotiate a better deal or rebates on past purchases. One such consultant mentioned to an owner about a rebate program on upgrading lighting fixtures and the payback period was so short he was able to retrofit several properties.

Fifth, look at your billing process. When you invoice will determine when you collect. Some firms bill in arrears, which means they finish the work and then wait to be paid. This means the company is the bank to the customer. So, the customer is using OPM (other people’s money) while the company struggles with cash flow.

Other firms bill in advance and expect some amount of the payment before starting work. Some companies don’t offer credit; they have customers pay via credit card before doing any work. This will all be a balancing act but my recommendation is to make it as easy as possible for your customers to pay you without it being an undue burden on your company.

Sixth, take a long hard look at your business and ask if you to execute with fewer resources. For example, can you cut the hours of operation based on the financial return? Can you reduce your offerings and eliminate the unprofitable products or services? Can you reduce the hours of your staff or reduce the headcount of your operation? These are not easy things to consider but every organization can benefit by bringing these things to the table to think about at a minimum.

Seventh, consider your pricing. Are you regularly considering increases? How do you compare to your competition, have you done some mystery shopping to see their offering, service and pricing options? I’ve noticed that companies are often overly concerned about raising prices but those who spend regularly are nowhere as sensitive when buying food or gasoline.

Eighth, make sure you have a pipeline full of good prospects. Be clear about who you want as a business partner; someone who understands the correlation between value, price, service and ongoing quality.

This may seem like a long laundry list but if you get started cash flow will improve. But this must be something you work on all the time, not just when you hit a tough stretch.