A question that often arises in growing businesses is “How come I’ve made more profit, but I still have cash flow problems?”
The answer to this question lies in the issue of the ‘Cash-flow Cycle’.
The ‘Cash-flow Cycle’ is an issue often overlooked by business owners until business starts to grow and they begin to experience ‘cash-flow squeeze’.
Let me explain how it works. In the diagram below you can see a timeline of 365 days.
The Diagram Shows:
- Depending on your sales cycle i.e. how long the stock sits in store, or jobs are in progress, you may not be able to invoice for 60 days.
- Before you can sell anything you have to buy something on day one i.e. stock, materials or labour on jobs/projects.
- Depending on the terms you get from suppliers you may have to pay for materials and labour after 30 days – which means you have 30 days negative cash-flow.
- Depending on your accounts receivable management you could wait 60 days to get paid – which adds another 60 days negative cash-flow.
- This adds up to 90 days negative cash-flow.
This means your money has been somewhere other than your bank account for 90 days i.e. in the bank account of your supplier, labour staff and your customer. This is referred to as ‘funding the sale’ or ‘working capital’.
Why the above causes a problem when growth occurs, is because the issue just gets bigger. If a business isn’t working to minimize the number of days jobs are in progress and the number of days customers are taking to pay, the problem just gets worse when sales grow.
Sometimes businesses get very focused on increasing sales and the issues of job management and accounts receivable get ignored or are not considered worth investing in. This is why business growth can often kill what appears to be a profitable business.
To minimize the number of days jobs are in progress you need to eliminate inefficiencies and rework on jobs. Here are some ways to speed up jobs
- Have a good job management system that allows you to track all stages and profitability of jobs. (Also allows you to get quick access to previous job information.)
- Have a system for following up quotes – the quicker you get the job started the quicker you can finish and invoice it.
- Have one person in charge of managing jobs who has a good understanding of status and progress.
- Manage labour allocation and track staff/contractor time spent on jobs. Schedule jobs and travel for efficiency.
- Have good ‘quality control’ to avoid rework and investigate ‘write-offs’ to avoid them in future.
- Use checklists so that staff aren’t having to ‘reinvent the wheel’ all the time. Also helps to maintain standards and improve customer satisfaction..
- Keep equipment well maintained to avoid down time.
- Have ‘Key Performance Indicators’ for jobs, such as number of quotes versus jobs won and lost.
To minimize the number of days customers are taking to pay, you need to implement a system to ensure that customers are invoiced as quickly as possible and everything is done to ensure customers pay as quickly as possible. Here are some ways to speed up customer payments:
- Ensure your customers understand your ‘terms of trade’ up front i.e. when and how you expect to be paid.
- Run credit checks on customers if it’s a large job. You don’t want to get caught out with all the costs and not get paid.
- Improve customer relations – happy customers will pay.
- Invoice immediately – don’t leave it until the end of the month. Why give customers extra days to pay on top of the time they will take anyway.
- Have someone in charge of collecting customer payments who understands the process.
- Report regularly on who owes what, so you know who to chase and if an outstanding payment may affect other work you are doing for them.
- Follow up appropriately – small amounts by email and large amounts by telephone.
- Make it as easy as possible for people to pay you. Accepting credit cards may work out cheaper than waiting 90 days for a transfer. Put your bank account details on invoices, so people can easily send funds to you. Use modern payment methods such as ‘Stripe’.
- Get progress payments or deposits if possible to help cover the cost of labour and materials through-out the job.
- Get tough – don’t write off collectible debts – there are good debt collectors around who can get the money for you.
A lot happens to cash on its journey from the sale to your bank account. If you are planning to grow your business you must understand and work to improve the situation, or you could be heading for problems.
For more details on factors impacting cash flow in a growing business, check out our eBook ‘7 Steps to Stop Cash Flow Chaos Forever’.