Cash Flow Problems – Who Is Really Causing Yours?
When it comes to dealing with the issue of having enough cash to run your business, a knee-jerk reaction to tightening cash flow is to hit the brakes on the invoices piling up for you to pay. The phones start ringing with people chasing their money, your employees spend precious time managing conflict, and ill-will within your trusted relationships grows by the day. Sleep, productivity, profitability and personal satisfaction become long lost memories.How much of your time and energy is spent managing the downward spiral of this loss of focus on doing what you do best?
Most small to medium size businesses go through this at one point, and in many cases cycle through it over and over again. While there is no quick answer to help dig out of a cash crunch, a couple of quick case studies should shed some light.
Case 1 – Medium sized HVAC Business. Cash was running in short supply despite solid appointments across all departments. Pricing was competitive in the market. Standard of work was high with a good likelihood of repeat business. Operating costs were within expectations.
Case 2 – Small Plumbing Contractor. Similarly, operating costs were within industry standard and they had a good flow of high margin jobs. Repeat business was a major strength and wages were competitive but within expectations.
Neither business would appear have any issues with cash flow upon reviewing their P&L. There it was in black and white: Revenue; tick. Gross Profit; tick. Net Profit; tick. On paper that is. But the reality was that for both companies, cash to meet the costs of operating the business was tight. Really tight.
The main issue that both businesses faced was getting stuck in the “delivery” cycle, where the focus is on doing all of the things to attract more business and service clients – but with little effort put towards collecting payment for those services. It’s a common trap, because this is where the business owner’s passion generally lies. It’s the cause that brought inspiration to start the business in the first place. Marketing the service; selling it to customers; delivering it with a high level of satisfaction. But what about the (boring) responsibility of getting paid for the work?
In both cases above, no examination of their “payment” cycle had occurred for at least a year and a half. Neither owner looked at A/R aging reports. When they finally did, they were surprised to discover that more than 50% of their clients had basically lived in the 60 & 90 day columns since the first sale. In Case 1 they learned that if accounts got to 60 days, on average less than 40 cents in the dollar was eventually collected. In Case 2, 30% of their revenue for the past 12 months was in 60 days or later. Bingo! Cash-flow crisis.
Both businesses simply had to get functional about their collection process. What expectations of payment were they setting? Who was setting them? What was their invoicing process? How did they collect payment?
In short, the core issue was responsibility for that part of the business. There were clearly defined responsibilities around sales and delivery, but no responsibility around owning and implementing the processes to collect payment on them.
Once the examination into their workflows, processes and responsibilities occurred they were able to re-educate the staff about how the revenue and administrative processes of the business need to work hand-in-glove. They also had the ability to set clear expectation of payment with their customers. Projects were launched to clean up aged accounts. The turnaround was staggering and quick.
Within 3 months of keeping the issue of doing the work AND collecting payment top of mind, the new processes became woven into the fabric of the business and future cash-flow was consolidated – depending on sales. The most remarkable aspect was the sheer amount of money collected just by having a person that was energetically focused on clearing up old balances. And the most effective method of collecting debts? Just call them.
Now, instead of worrying about how to pay their own bills, that time and energy was now available to focus on other issues like planning, strategy development, growth opportunities, customer service and profitability. And of course, the business once again became a fun place to earn a living.
1. The money to ease your cash flow crisis may already be sitting on your books
2. Set clear expectation of payment with clients – up front
3. Get your invoicing and payment processes tuned up
4. Have the right people in your business – focused on the right job
5. Review your A/R aging on a weekly basis. A quick glance will show any problems
6. Every past due account is YOUR money sitting in your customer’s bank account
For more information or to discuss your particular needs in this area with an
expert business coach, please contact us and schedule a complimentary initial
telephone consultation where we’ll provide a customized
12-point growth plan for your business.
Breakout Consulting, LLC
Dearborn, MI ∙ San Diego, CA