Cash-flow fitness for a growing small business

Most business owners pay themselves last. That means if there’s ever a blip in cash flow, making payroll and paying rent always came first. Cash flow is pretty much the be-all and end-all for a small business. Everything we do serves it.

But you don’t want to master cash flow simply to avoid payroll crunches (although that’s a pretty good motivator). The real reason to get a grip on cash flow is because cash in the bank is what gives you freedom – the freedom to bring on more help, to launch new products, enter new markets. It’s how you grow without giving up equity or taking on unnecessary debt.

This is a topic that no single blog post could hope to put a dent in. Becoming “cash flow fit” is a learning process that could take years. Even if you master the money dynamics of your business as it currently exists, things keep changing. If you keep growing, you’ll encounter entirely new cash flow challenges.

In the meantime, here are a few questions to consider. Think of this as a check-up with the cash-flow doctor!

𝥷 Are you actively working with a CPA?

This English major has sure gained huge appreciation for the accounting arts. The fact is, CPAs aren’t just for tax time anymore. Beyond helping organize and account what has happened, they are skilled at using data to detect historic patterns and forecast future troubles.

Start by asking your CPA about what an ongoing advisory engagement would look like, whether it’s on a monthly or quarterly basis. They probably already do this for many other businesses like yours.

You’re probably not at the point where you can afford an in-house CFO. But did you know that some professionals offer their services as fractional CFOs? This could be an affordable alternative. You could probably get some referrals from your CPA.

𝥷 How aggressively do you collect on receivables?

Getting what’s owed to you ASAP is the name of the game. If you’re plagued by sluggish accounts receivable, consider these ideas:

  • Be sure to track the aging of your receivables. Most bookkeeping applications provide a report of receivables by age. Make it a game to see what you can do to bring down your average age over time.
  • Get creative about late invoices. It’s possible you’re not getting paid because in the scheme of things, your invoice is a low priority. You might be able to offer a discount for immediate payment. That’s an offer that many CFOs can’t refuse.
  • See if you can make your payment terms more aggressive. Or negotiate payment terms that bring in cash more frequently over the duration of a project, rather than at the end.

𝥷 Do you communicate and negotiate with your creditors?

Do you know ahead of time that you’re going to be late on a payment? Call the creditor and tell them. If you can’t make a full payment, perhaps there is something you can offer instead that shows good faith and a desire to keep your account current. For instance, you might say: “I can make a half payment today…and then I’ll pay the remainder in 2 weeks, plus 10%.”

We have seen this approach work with vendors of all kinds, including landlords! Companies that work with small businesses know that their customers have cash flow problems. It comes with the territory. So, remember that they’d rather get paid something and know that you’re making an effort – than to get paid nothing at all and have no information about your intentions.

𝥷 Are you actively diversifying your client list?

Many firms have gone down in flames due to the problem of having a majority of their business with one client. It’s an understandable problem – a client appreciates your work, tells other managers about you and they also hire you. Pretty soon, you have multiple clients within one company. On the face of it, that’s not a problem because not all of those managers are going to conspire to stop hiring you at the same time. However, their employer might make a company-wide decision to change how it does business with contractors – which could instantly put you in a world of hurt.

Some rules of thumb for keeping your eggs in different baskets:

  • Never let more than 50% of your business come from one company. As you start to see one company dominate your client list, make it a priority to scare up new clients.
  • Try to cultivate clients who are in different industries, as they might each have different cycles of growth and decline.
  • Try to cultivate clients that have different business cycles. Some businesses have seasonal work flows (e.g., retailers do a lot of work in the spring/summer to be ready for peak holiday sales), whereas others have workflows that revolve around trade shows. Yet others have work demands that are centered on product releases. The goal is to have a diversity in your portfolio that minimizes cash-flow droughts.

Cash flow is just one of the many area where you’ll encounter a steep learning curve as you grow and professionalize your business. We cover the this and other challenges in our e-book “Growing Up: A guide for small business owners”