By Jim Talerico,
Shortly after the President shut down the economy because of Covid-19, small business owners began reaching out to me asking how they can better manage their cash. The three best practices I recommended — after seeking SBA grants & loans, cutting unnecessary expenses, and reaching out to creditors — were: (i) creating a 12-week cash flow forecast to better track cash inflows and outflows, (ii) doing a better job conditioning customers about paying at the time of sale, and (iii) proactively managing their accounts receivable collections process.
Most small business cash management systems can be summed up as looking at what’s in the bank, what the business has to pay, estimating what cash the business will receive later in the week and then sending out the checks for the week. It shocks me how many small businesses incur “avoidable” bad check fees because they sent out payments without knowing for sure if there will be enough cash in the bank to cover the payment when it’s cashed.
Creating a 12-week cash flow forecast allows business owners to see what their cash inflows and outflows will look like several weeks out, so they can proactively manage their cash by either accelerating receivables or deferring payables. Every business owner should be looking at this forecast a few times a week and taking actions to adjust their plan as needed. Business owners unfamiliar with how to create a 12-week cash flow forecast, can e-mail me at jjtalericojr@GPBusinessSolutions.com, and I will send out a complementary cash flow forecast spreadsheet along with instructions to help them better manage their business’ cash flows.
Cash flow planning involves ensuring sufficient time between the time you collect from your customers and when you have to pay your vendors and employees. Conditioning the customer about payment begins during the sales process. The best time to discuss payment terms is during the sale, because that’s when the customer is the most open. Smart business owners cement the customer’s commitment to pay in a timely manner at this time.
Other ideas successful business owners use to manage their cash flows include the below strategies:
Managing Cash Inflows:
⦁ Getting customers to give you an upfront payment, periodic progress payments, and then payment of the balance at the end job;
⦁ Offering discounts to select customers for early payment;
⦁ Managing inventory levels, and periodically discounting older, outdated inventory to generate cash;
⦁ E-mailing invoices daily to ensure the invoice gets to the customer ASAP;
⦁ Performing credit checks on customers and instituting a “Cash on Delivery” (COD) alternative to slow paying customers;
⦁ Pivoting their sales to their most profitable products & services; and
⦁ Using a 3rd party financing company – so the business gets paid upfront, while allowing the customer to make payments over time.
Managing Cash Outflows:
⦁ Taking full advantage of payment terms, and using electronic transfers to make the payment on the last day payment is due;
⦁ Communicating with creditors and vendors when you need to defer payment;
⦁ Asking vendors about discounts for paying early or more flexible payment terms. Most business owners don’t realize that a 1% cash discount actually works out to be an annual return of 18%;
⦁ Signing all checks, so you make sure you are reviewing every payment sent to vendors; and
⦁ Continually looking for ways to reduce unnecessary expenses.
Making A/R collection calls each week to proactively manage your cash is critical, because “the squeaky wheel gets the grease”. The statistics speak for themselves: an invoice that is over 60 days has only a 70% chance of being collected in full, an invoice older than 90 days 45%, and after 120 days the chances of collecting the entire invoice drops to just 20%.
Suppose you have to write off $10,000 in bad debt, well, if your profit margin is 10%, that means you have to generate $100,000 in additional business just to make up for that loss.
The good news is that there are only a handful of excuses customers give for not paying on time, and these objections are fairly easy to overcome.
⦁ I didn’t get the invoice. Resend the invoice, make sure they received it,
ask for payment, and follow up, as needed.
⦁ The invoice isn’t correct. Fix it, resend it, make sure they received it, then
follow up by requesting payment.
⦁ I don’t have the money. Ask when they will have the money, or consider
breaking up the payment and follow up until you are paid in full.
⦁ There is problem with the Fix the problem, ask for payment, and follow up.
finished product / service.
Be courteous, but firm, when asking for payment. Remember, you have provided a product or service, and have a right to be paid as agreed.
Establishing a relationship with a local banker and getting a line of credit can give a business owner a cushion, but that is easier said than done for many businesses. The report “Cash and Liquidity Management” surveyed 325 mid-sized business owners and found that 58% of business owners stated that cash from operations was their main source of capital for growth, and 8% pointed to equity investors as a source for financing, leaving less than 25% relying on debt financing.
Making smart moves to manage your cash flow is more important than ever in today’s economic environment. These three recommendations will allow you to take stock of cash position, think about your current cash conversion situation, and ensure that you are doing you best to collect your cash. If you need additional help, contact your business advisors, who may be also able to suggest ideas you might have overlooked. Hang in there … you can do it!
Looking for more ideas to successfully emerge from the current Covid-19 crisis? Check out our Small Business Owner’s Covid-19 Survival Kit available through our on-line store on our Square web site https://greater-prairie-business-consulting.square.site/.
It contains over two dozen files filled with a plethora of financial, tax, HR, safety, leadership, sales, marketing, and government information to help business owners survive the Covid-19 Coronavirus Crisis.
We offer a 100% Money Back Guarantee if you are not completely satisfied, and free, periodic updates!
James J. Talerico, Jr., CMC ©
About the Author
A nationally recognized small to mid-sized business (SMB) expert, Jim Talerico has consistently ranked among the “top small business consultants followed on Twitter.” With more than thirty – (30) years of diversified business experience, Jim has a solid track record helping thousands of business owners across the US and in Canada tackle tough business problems and improve their organizational performance.
A regular guest on the Price of Business on Bloomberg Talk Radio, Jim’s client success stories have been highlighted in the Wall St Journal, Dallas Business Journal, Chicago Daily Herald, and on MSNBC’s Your Business, and he is regularly quoted in publications like the New York Times, Dallas Morning News, Philadelphia Inquirer, and on INC.com, in addition to numerous, other industry publications, radio broadcasts, business books, and Internet media.
Jim Talerico is a certified management consultant CMC ©, an honor bestowed on only 1% of all consultants worldwide. He is also the founder and CEO of Greater Prairie Business Consulting, Inc.
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