BY ANDI GRAYDilemma: Cash flow is short and money is tight, which makes it hard to plan for the next three to four months. And I’m worried about what comes next if we lose money during our slow period. On top of everything, we have three payrolls in one month coming up soon. How do I put this financial stress behind me? We’ve been making money, so I don’t understand why this is an issue.
Thoughts of the Day: Look at the whole picture to figure out how the business is doing. Make sure you’re using credit lines properly. Be disciplined about managing the situation. Sell your way out of the problem the right way.
Casting a wide eye on all areas of incoming and outgoing payments will help you see not only the whole picture but also how all of its smaller elements influence each other. Pull together information from both your income statement and the balance sheet. In order to have a good handle on cash flow, you need to accurately forecast when business is coming in, when you will get paid by your customers, and losses that you could face—while being mindful of any bills you have to pay.
One of the big problems with seasonally cyclical businesses is that as the business ramps up, cash tends to dry up. You have to pay for field labor to do work ahead of getting paid, and you may have to put money out up front for equipment and materials ahead of payment, as well. Getting advance payments from customers could help cover early cash outlays.
“Ignoring a problem doesn’t make it go away, and, in fact, negligence can turn a mild inconvenience into a major issue.”
Keep track of what customers have paid and still owe by using the accrual function in your accounting system. Compare projected and actual profits by customer. Research what went wrong with the customers that looked profitable but turned out not to be. Don’t wait until the end of the job to throw extra costs at a client. Negotiate with the passenger or their travel department throughout the period of time you’re working together to make sure you’re both on the same page about what you expect from each other.
When things slow down, get the credit line paid down. Put money away in savings. Resist the temptation to overspend: The extra cash you have on hand now could be your saving grace tomorrow.
Credit lines should only be used to cover costs and expenditures that support reasonable growth. Drawing down on a credit line to pay regular monthly bills is a bad idea. Make sure you have enough gross profit to keep your office running optimally all year round.
Negotiate with your bank for increases to the credit line when you have cash on hand and are coming off a profitable year. The bank is not an investor in your business, so don’t expect it to bail you out when times are tough. Plan ahead and make sure you have a cash and credit cushion in place before you find yourself needing either one.
Sometimes, owners stop looking at the books because they don’t want to deal with the headaches. That’s foolish: Ignoring a problem doesn’t make it go away, and, in fact, negligence can turn a mild inconvenience into a major issue. The truth is often not nearly as bad as what’s imagined, especially if you face it directly and quickly. And it’s only by getting to the bottom of what’s going on that you’re going to be able to see how to dig out of a problem.
Set up weekly reviews of all finance reports. Establish what key measures you want to track—and aggressively stay on top of them. Suggestions for weekly reports include new invoices, payroll, hours on the job, hours of work on hand, customer backlog, and revenue.
When things get really tight, look at your costs and what can be done to boost the most profitable sales. Confirm that you’re making the money you need to not just survive but thrive by tracking costs of goods sold and comparing that to revenue. That will offset overhead costs while helping you keep your head above water. [CD1117] Looking for a good book? Try “Fundamentals of Credit and Credit Analysis” by Arnold Ziegel.
Andi Gray is the founder of the business consulting firm Strategy Leaders. She can be reached at firstname.lastname@example.org.