Better cash flow in your small business

One of the best ways to improve cash flow is to collect the money owed to you, sooner. Many small businesses overlook the basics of accounting and bookkeeping principles. These ideas apply to all companies, whether you live in Raleigh North Carolina or Madison Wisconsin.

The best business advice

A wise person once told me that the first day you open your business should also be the first day you start thinking about how you’re going to sell it. If I did that, he guaranteed that I would run my business altogether differently.

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Successful small business based on disciplined spending

There seems to be a very strong correlation between small businesses that are struggling to make ends meet, and are also spending too much money on meal & entertainment expense. In my casual observance, when I examine accounting records, I begin to notice declining sales, margins, and profit when meal and entertainment expense is greater than 0.5 – 1%. Excessive spending in this area, such as 3-5% of sales is typical for companies in deep trouble.

It’s not that spending on coffee or lunch in and of itself is draining away needed cash flow. Rather, I think it’s more a problem of not having enough discipline to carefully monitor and curb outgoing cash flow. This unusually falls under the guise of “business luncheon”, “networking”, and “prospecting”. Good bookkeeping records with software such as QuickBooks or Peachtree will help measure this expense, but you’ve also got to be prepared to change habits if you want to improve. I find changing habits to be the most difficult task.

There is no correlation to the industry or kind of business. I see the problem with professional service firms as much as I do with contractors and retail businesses. How does your business compare? Is my theory right or wrong?

Customer Loyalty

The difference between attracting a satisfied customer instead of a loyal customer is the difference between single-digit growth verses double-digit growth, a modest advertising budget and no spending on advertising (because they spread the word for you). It’s the difference between liking something and falling in love.

How many restaurants do you like, and which ones do you love? I’ll bet with the establishments you love, you’re also spending more money, telling more friends, and forgiving more readily if something went wrong.

How do you know if your customers like you or LOVE you? A customer satisfaction survey will ask things like, “Were the bathrooms clean?”, “Was your hold time within reason?”, etc. Your customers could answer yes to all the above and just be satisfied.

A loyalty survey on the other hand asks only one question: “How likely are you to recommend our business to a friend or college?” The response is measured on a scale of 1-10, with 9 or 10 being a loyal customer, 5-8 being satisfied. Anything less than a five and that customer is detracting from your business. Send me an email, if you’d like a copy of the survey.

Improving Cash Flow with better Collections

A client once told me that the best part of owning her business was when she prepared and sent the monthly invoices. I’d take it one step further and say it’s when you actually receive the money. There’s a considerable difference between the two. Enough in fact to kill “profitable” businesses, because they couldn’t or didn’t’ collect money fast enough. Next to crushing debt, this is arguably the second biggest reason so many small businesses have shut down in the past 2-3 years.

Understand what your average days outstanding are, for your accounts receivable. This is expressed in number of days. For example, electrical contractors are typically at 55 days, child care centers collect in 4-5 days, and commercial printers in 44 days. Then set a goal to become better than your industry benchmark, better than you were last year, better than last month.

There are very specific methods to improve your collections. The most overlooked strategy is by simply assessing a finance charge on overdue balances. I can’t tell you how many clients have tried this, only to see money start flowing in.

Ashgrove discusses small business cash flow and QuickBooks accounting

See the video:

Do you know where your business is going?

The Matching Principle

There’s a simple financial principle regarding the management of debt, that many small businesses don’t follow. It’s called the matching principle. It basically means that you should use long term money for long term assets and short term money for short term assets. A good example is your line of credit. Because this gets renewed every year or two, it’s considered short term debt. Using it to cover payroll until an expected customer payment arrives is appropriate. The point is, it gets paid back within a couple of weeks or months. This is not something that should carry a balance year after year.

Once I owned a retail business, and within the second year of business I used the heavy cash inflow from spring sales to pay for a new asphalt parking lot. This was a bad idea. Remember long term assets (like a new parking lot) should be funded with long term dollars, like a 3-5 year loan.