finances

Question on LinkedIn by Sandy McMahon

A: Revenue and cash flow inconsistent? How many of these will work for you?

  • Counter-cyclical revenue sources. If you have a down season, what could you add that would bring in revenue at that time? Could you offer sales or specials to incentivize customers to buy during the off season?
  • Different size jobs or customers. Suppose you have big projects with big gaps between them. Could you add some medium-size or small jobs to fill in the gaps between the large ones? Assign these to your junior staffers.
  • Make sure you’re billing for all the work you do, billing on time, and collecting what’s due you. I can’t believe how often I discover that cash-poor clients are billing only after 30 days . . . and not collecting for 60!
  • Revolving line of credit. Are your revenue cycles predictable or not? If predictable–say, you know that every Q1 and Q3 are slower–then you need to manage your Q2 and Q4 cash to bridge the slow periods. Or have a revolving line of credit that you draw down then repay as the cycle turns up.
  • Fatten up, then hibernate. If you are a sole consultant, and you suffer from a couple of slow months every year, then do your cash flow planning based on a 10-month year. Make sure those 10 months give you what you need for 12 months. Then take two months vacation each year! Better than stewing about no business. Don’t tell me your clients can’t get along without you. They’re not doing any work during the holiday period either.
  • Change the way you price. Change from hourly billing to monthly, or even annual rates. Most of my clients pay us a set monthly fee, and this greatly eases my cash flow worries.
  • Raise your prices. If you have cash gaps, you are under-pricing. Your clients want you to be available when they need you. This requires that you stay healthy even when they don’t need you. That overhead needs to be built into your pricing.

Wildly fluctuating revenue? If your cash cycles are just not very predictable, then what? The less certainty in cash flow…

  • …The bigger cash cushion you need. You need enough cash + line of credit to carry you through 2x your biggest swings–from peak to trough, and from peak to peak.
  • …The lower your overhead should be. Unpredictable, highly-variable businesses need to be low overhead, high margin. You need fast payback capital investments. Nimble and flexible. This includes your work force. They’ve got to know that they work only when there’s work to be done.
  • Innovate! How can you reinvent your business to get out of such a stress-inducing model?

Bad marketing = cash crunch. Inconsistent revenue may follow from mediocre marketing. You may need to tune up your marketing. For example:

  • You need better customers. You’re going after the wrong ones. You want customers that give you the level of business you need, pay your price, pay you on time, and are so happy they refer others to you. This requires knowing the value of what you sell, and being able to communicate this to those who value it. And of course delivering it well.
  • Cross-sell and up-sell to your customers, and ask for more business. Have a higher-price premium offering.
  • Change your offering so that it commands a higher price point. Make sure you’re not perceived as a commodity, and thus subject to being bid down.
  • Offer add-on services that bring in a steady revenue stream. For example, a maintenance or management contract after the initial job.

Growth sucks up your cash. Everything I said assumes a steady-state business. If your company is growing, all these dynamics are exacerbated. Growing companies are often strapped for cash, despite increasing sales, due to the gap between sales, paying cost of goods sold, and collections. In addition to smoother cash flow, you need an infusion of permanent working capital to cover the cost of your growth until it can be recouped through increased profit.

What other good ideas would you add to my list? Add ’em in the comments below.

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I say it’s a myth.

cash management, cash flowBelieving this shifts attention away from the real problems. It’s like saying the leading cause of death is your heart stopping. Well, duh. But why did your heart stop? Most heart attacks hit people who haven’t been taking care of themselves for years.

Same with business. Running out of money is often the endpoint of years of bad decisions. For example:

Not watching the numbers closely. Not having financial statements you can understand, and not getting or reviewing statements in time. You should tell your bookkeeper/accountant exactly what numbers you need to track, when, and how you want them displayed. If they don’t give you what you want, replace them.

Not controlling costs. Keeping unnecessary payroll and other expenses. Some owners borrow money to avoid laying people off. During tough times, if you’re not ruthless with expenditures, you won’t have the reserves to take advantage of later opportunities.

Focusing on revenue instead of profitability, therefore not paying attention to the margin of jobs or sales. Taking any work. “I’ll make it up on volume.” “Maybe they’ll grow to be a big customer.” Don’t bet your business on these beliefs. Insist that every job must make a profit. Make sure you have systems that allow you to allocate costs to profit centers, so you can know the profitability of each thing you sell.

Under-pricing. Many small businesses try to meet the prices of large, well-capitalized competitors, rather than competing on unique services and features that set them apart and command higher prices. Set your prices to include your desired profit margin.

Not anticipating needed growth capital, so that a growth spurt causes a cash flow squeeze. It’s very difficult to grow relying on current cash flow. People criticize companies like Apple for amassing a huge cash hoard, without realizing that this is necessary to fund growth, innovation, and keeping options open.

Having the wrong kind of financing. Financing growth with a short-term line of credit that must be paid off each year, rather than with a 5- to 7-year term loan. And how many of us have financed growth on our credit card, thus saddling ourselves with interest payments that eat up the profit needed to repay the loan?

Not saving during good times, so that you have a fund for tough times. Too many owners would rather spend than save because they don’t want to pay taxes on the profits.

Not being “bankable.” For example, if you run your business to minimize taxable income, you’ll never get a bank loan. Try telling your banker that you really do have a profitable business, despite what your tax returns show. Take your banker to lunch, and ask what the bank will need from you in order to approve the loan you will need.

Not refining your business model to stay competitive and to meet the emerging needs of your customers. Just staying the same because it’s the easy thing to do. The old cliché, “Work on your business, not just in your business,” means that you as owner need to keep looking at opportunities, challenges, alliances, and strategies.

Ineffective marketing. If you don’t keep looking at what works, refining your offering and outreach, and dumping the rest, your business will slowly decline. Where can you get the most bang for your marketing buck? What ineffective things should you drop? How can you leverage your effort?

I’m sure you can think of others. If you address these problems in your business, you’ll never have to use “I ran out of money” as an excuse.

This is one of the lessons in How to Thrive in Tough Times—Lessons From Small Business Owners–my newest ebook, just posted on Amazon for Kindle, iPad, etc. for $2.99.

 

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