Where’s your cash?

You’re making more sales than ever, but your bookkeeper says your company is in a cash crunch. How can it be?

The problem may be simply in your cash flow management, say the experts.

Jeffrey Moreland, vice president and treasurer of Jaymore Electrical Products & Systems Inc., says too many business owners look at sales growth and profitability and fail to pay attention to cash flow.

While profitability is one measure of your company’s performance, it’s not going to keep you afloat. On a day-to-day basis, it’s cash — or the lack of it — that will make or break your business.

No wonder business owners get caught in cash flow limbo. The mathematics of cash flow can be tricky.

Consider this example: You get a few new customers that bring you an additional $200,000 in business each month. Sounds like a blessing, but it could turn into a heartache. Your payables average 15 days, while your receivables are averaging 30 days. Somewhere along the line, you’re going to need an infusion of another $100,000 into your cash flow to handle the extra business.

Why? Because you’re going to have to cover the 15 days of lag time between when your bills come due and when your customers pay you.

Moreland says there are a number of factors that can contribute to cash flow problems, but the principal causes are:

  • Poor profitability — It may take a while to show up, but poor profitability will eventually erode your cash flow. Either you’re paying too much for goods or not charging enough for your product or service. New businesses are particularly vulnerable, since the tendency is to try to undersell the competition to get the business.
  • Rapid growth — Aggressive growth likewise can eat up your cash. New business often requires additional inventory, more in receivables and additional capital investments.
  • Poor management — Basing investment decisions on profitability, adding unnecessary expenses and faulty business systems can lead to cash flow problems.
  • External forces — An increase in the cost of goods or services to you, shrinking markets and the introduction of new competitors can put a noticeable dent in your cash flow.

    When facing a cash flow crisis, Moreland suggests, communicate with your vendors and be upfront. Let them know that you’re going to be late with payments.

“You can’t hide,” says Moreland. “They’ll just stop shipping or go C.O.D.” He suggests selling off useless assets, taking the ax to your budget and prioritizing who you are going to pay. Under no circumstances should you draw out of tax accounts, says Moreland.

Other ways to ease cash flow woes, he says:

  • Consider leasing equipment instead of purchasing it. Upfront costs are usually less, leasing companies usually have more liberal credit standards than banks and there may be tax advantages.
  • Use bank financing for asset acquisitions, such as real estate or equipment, but not to finance inventory costs for a ramp-up in business.
  • Try to negotiate better terms with vendors.
  • Ask for a deposit from customers on orders or offer a discount for early payment.

Marcia Schwab, a senior management consultant with the University of Pittsburgh’s Small Business Development Center, suggests that business owners do a monthly and yearly cash flow forecast to determine where cash needs will fluctuate and start early to plan for the changes. Early planning to secure financing through times when cash is likely to be scarce is sound management.

Says Schwab: “Going into a bank at the last minute is perceived as mismanagement.”

Ray Marano ([email protected]) is associate editor at SBN.