Cash flow truly is king.  82% of businesses fail due to severe cash flow issues. Understanding and implementing effective cash flow management is crucial to the successful running of every business, regardless of size. Cash flow optimization needs to target each area of the business—expenses, accounting functions, accounts receivable, and account payable. Each business may have strong points and weak points; however, even a small % change in cash flow management will have positive effects on the business.

Increase cash flow through accounting!

1.Correct Bookkeeping

Bookkeeping, bookkeeping, bookkeeping.  This is the first step in understanding and increasing your cash flow.  If your books are wrong, everything you do financially moving forward is based on incorrect data.  And this, my friends, can be a huge problem.  I understand that bookkeeping is tedious.  It takes time you don’t want to use on a task that you may struggle with and find super boring.  There are outsourcing options to fix this if you truly hate it or genuinely cannot find the time to do it.  However, I urge you to realize that you get what you pay for with bookkeeping services. If you want the cheapest bookkeeping company out there, expect to have inaccuracies and problems with the data. If you pay more, then its likely you have an accountant doing the work for you, and that will ensure that the books are accurate.  Additionally, services that provide more than just bookkeeping such as controller services, CFO services, or managerial accounting services understand how the bookkeeping affects the business more than just a bookkeeping firm.  Because of this, I recommend looking for those types of companies.

2.Budgeting and forecasting

Budgeting and forecasting are some of the most important things you can do for your business.  Understanding how the cash within in the business is moving is extremely important.  As mentioned in another blog, a basic forecast and budget can help you identify when you are likely to run into cash flow issues so you can budget better to ensure that doesn’t negatively impact the business.

3. Job costing/project costing

In construction, knowing what your profit is on each job is important.  Nobody wants to go into a job thinking you’re about to make a big payday and end up making a loss!  A well-designed job costing system tracks the true costs to deliver the service and helps you achieve your estimated gross profit. Job costing allows you to know how much extra you spent directly out of your profits due to mistakes, employees damaging equipment, etc.  If you have employees implementing time tracking to complement the services provided, this will ensure that you are allocating the right pricing to each project. For companies that are using the cost-plus method for materials in QuickBooks Online, you can input all the expenses you have and apply them to specific jobs.

4.Understand fully loaded labor costs

Fully burdened labor costs are all the associated costs to hire an employee. It typically calculates out to be 1.25-1.4 times the base salary range for the employee.  For example, if you have a salary of $50,000 and multiply it by the 1.4 rate, the labor costs of the employee for the company equals $70,000 per year.  Examples of burdens are federal and state taxes, Medicare, social security health insurance, 401k fees, and more.  Understanding what each of your employees costs you with all the added burdens of having that employee will help you when pricing a job.  It gives full visibility into whether you will make the amount of cash you are wanting to.

 

5.Improve your inventory

Audit your inventory.  The goods you buy don’t always move at the same pace as your other products. They tie up a lot of cash so instead of buying more of what doesn’t sell, get rid of those products…even if you need to off load it at a discount.  I understand that its hard to walk away from products you really love.  I also understand having high hopes that you have found a future hot item that you can’t keep on the shelves so you should hang onto the product.  But honestly, that rarely happens.  Be objective and not emotional.  Buy that item in for the person who needs it on that odd occasion that they do. Losing one sale to free up that cash that you have in assets is a better bet and will help your business long term by giving the ability to invest in more of your best-selling items.

6.Understand your days sales in inventory

This is a very important indicator that flows from the above topic, and a lot of you are probably like what is this accountant talking about?  Why does this matter?!  I get it…bear with me while I work through this with you as you need this in your life.  To work out your average inventory, use the follow calculation:

Average inventory formula = beginning inventory ÷ ending inventory ÷ 2

This can be calculated monthly or yearly depending on how you buy your inventory.  This tells you, on average, how many widgets you are selling per month.  If you do the calculation over the year, it will allow you to keep the right amount of stock on hand throughout the year.  You would then need to forecast what your expected growth is and purchase the extra inventory to accommodate that.

7.Internal controls for theft

According to a Hissox study “employee theft on average costs us businesses 50 billion per year”.  In 28.7% of cases, the theft took place over a 5-year period, and 70% of all cases occurred at companies with fewer than 100 employees.  Putting internal controls in place is essential to ensure that cash flow isn’t affected by theft. The person creating the bills should not also be the person to pay them.  Additionally, the person reconciling the accounts should not have access to be able to pay and create bills.  After all, there is a chance that small sums of money will end up heading into someone’s back pocket.

8.Use high interest savings accounts

Holding reserves of cash is a smart move for when your profits dip due to seasonal fluctuations, changes in the market, or investments not going as well as you thought. Additionally, keeping money back for quarterly tax estimations and sales tax is encouraged as well.  Putting all these additional funds into a high interest bank account that you can touch will help increase cash flow.  It won’t be a large amount; however, over the course of 10 years it starts to add up for the business. With $25,000 in the account consistently over 12 months with 0 deposits and a 2.25% APY, it will net you around $568.34 a year.

9.Get rid of unprofitable or break-even clients

This is one of the harder issues for a business owner to accept.  I understand that getting rid of clients that you have worked hard to get seems counterproductive.  But you know who I’m talking about.  You’re thinking of some of your clients right now that are unprofitable—the High Maintenance Harry and the No-Pay Nancy.  They take up more time than your highly profitable ones, expect more of you and your staff, pay late, and have nickel and dimed you until you make nothing on them.  Take those clients and do the math.  Use your fully loaded labor costs and your project costs and identify how much time they utilize a month. Tally it all up and find out how much money these types of clients are costing you a month. Then multiply that amount over 12 months or by the amount of time they have been a client.  For those of you who hate this idea still even after understanding the actual cost of those clients, when you bring a new client on then get rid of the unprofitable one.

How to increase cash flow by timing your expenses correctly

For most businesses, payroll is their biggest expense which accounts for roughly 70% or more of the expenses.  Managing payroll correctly will help you optimize your cash flow.  Ultimately the goal for payroll should be that payroll is completed after you have been paid by the client.

10.Establish a delayed 2-week payroll start: Implement a two-week waiting period between the time someone finishes work and the time you pay them.  Once this is set up, it only affects new employees.  This allows more time between the client being invoiced and possibly getting paid. It gives more time to process payroll which will help minimize the chances for mistakes.

11.Use semi-monthly payroll vs bi-weekly payroll: So, what’s the difference? Twice every year bi-weekly has 3 pay periods which can strain the businesses cash reserves, especially if it hasn’t been budgeted correctly. A semi-monthly payroll allows you to have a consistent payroll for 12 months out of the year

12.Audit your business’s expenses: Look at your expenses line by line. Try to find expenses that are no longer necessary or have become outdated.  Analyze how this contributes to new sales or current client retention. Another option is to look for cheaper products that do the same thing.  Competition is fierce in the business world and changing rapidly! You can likely find something that does the same thing but for a cheaper price.  Cutting or downgrading expenses is also a lot easier than ramping up sales.  You decrease the expense, increase your profitability, and doesn’t affect productivity.

Increase cash flow through by optimizing accounts receivable.

13.Measure Days Sales Outstanding

You can’t manage what you can’t measure.  To measure your cash flow, you need to track and watch very carefully your Days Sales Outstanding (DSO). DSO measures the number of days it takes a company to collect cash from its credit clients.  In other words, it shows how well you collect cash from your customers. The sooner the cash is collected, the better your cash flow (or liquidity) is.  Lower DSO shows the company is the better at collecting those funds.

To calculate your DSO a quick calculation needs to be done.

DSO = Accounts Receivable/Net Credit Sales x 365

If you have 30 day terms with your clients and your DSO is sitting at 45 days, this tells you that you need to look at your collections processes and see if there is a better way for you to be able to lower this closer to or exactly at 30 days.

14.Implement a written credit agreement

For those companies who give terms to their clients, construct a written credit agreement and have clients sign that agreement. Detail out the process exactly.  Include your expected payment date and how much that is likely to be.  Be sure to make them aware that these are your terms.  Explain that if items become a certain amount of time overdue, they will be turned over to collections.  In the fine print, be sure to detail out who will pay the attorney costs if legal action must be taken due to non-payment.

15.Set up a late payment fee

In the terms and conditions, detail out that late payments will be met with penalties.  The general percentage charged for a late payment is 1.5-1.8% of the total monthly bill.  It is not your responsibility to let your customers’ cash flow problems become your cash flow problems.  This ensures that your companies’ money isn’t an interest free loan to someone else.

16.Get paid in advance

This is a very straight forward approach and may not work for everyone, but it is a great way to improve cash flow get your invoice amount paid 100% in full.  Don’t do the work until you see the payment.  You can then pay all the necessary expenses for the job and labor costs.  Then invest the remaining money in different areas of the business where necessary.

17.Get an up-front deposit or retainer

If your type of business is not conducive to being paid in advance, getting a deposit or a retainer on the front end is a very good way to ensure you don’t have a negative cash flow.  I would recommend 50% up front, then before work even starts that increases your cash flow dramatically and allows you to buy the materials you need and pay off bills so you don’t have to worry about the next payroll!

18.Bill weekly rather than monthly

I have noticed a lot of projects get billed monthly.  It is extremely hard to keep your cash flow positive and steady if you are doing this.  The bank account will never remain consistently high if you bill a client, buy materials, pay payroll, pay off the accounts payable, and then you have a client not pay on time.  It is setting you up for a stressful situation.  Instead, bill weekly.  This will help the businesses cash flow and stop the business bank account from dipping too low.  As you pay for the expenses, the money is being replaced plus whatever profit you have acquired from the job.  Vistr, a cash flow and forecasting blog, analyzed over 300,000 invoices of companies who invoice weekly or every two weeks.  They found that invoices that got sent on weekends got paid 10 days faster than those that were sent on Tuesday, Thursday, and Friday.

19.Bill milestones if you can’t bill weekly

Once you have set up the credit terms and established that you will get a 50% deposit on the front end, you may try to bill weekly and your client is like NOPE!  Well there is another option, you can bill milestones.  This is the best way to stay positive with cash flow throughout the course of a large project. Timing of the payments should be based upon something material you can point to.

The payment schedule should allow you to stay cash flow positive as you move through the different phases of the project.  This allows you to have enough capital to be able to pay for the next phase.  I would recommend this payment schedule – Deposit – 50%, Milestone 1- 25%, Milestone 2 – 15%, and final payment- 10%.  In general, the smallest payment needs to be last as this is when most of the expenses for their business begin to arise.  Making sure that there is not a large sum of money left to be paid at this point is key in case of late payment or the customer trying not to pay for whatever reason.

20.Send invoices out immediately

This is a very straight forward practice that all companies should do.  As soon as the job or project is complete, send the invoice.  If you finish the job on the 3rd day of the month and then wait until the following month to bill, you have wasted 28 days before the client even sees the invoice.  If that client then takes 30 days to pay that invoice, that’s 58 days before you see that cash.  Now think about that if they take 60 days to pay the invoice.  I am sure you get the picture.  If you haven’t implemented the suggestions above, then the problem starts to compound.  After all, employees won’t wait for payroll.

21.Offer discounts on timely payments

Everyone loves incentives.  I think my wife has punch cards and scan cards for everywhere she goes.  If you offer your clients a discount for paying their bills ahead of time, you are creating a situation that is a win/win in maximizing cash flow for you and for the client.  You get your payments in a timely manner, and they save for paying in a timely manner.  You will see receivables get paid quicker, and it will help lower your stress levels since you are not chasing down consistently late payments.

22.Accept credit cards and make payment easier for the client

Small business owners often don’t want to accept credit card or merchant service fees which can range from 2-3%.  Realistically, unless your invoices are few in number and have very large invoice amounts, the benefits of getting the invoices paid faster outweigh the 2-3% charge you might incur.

Add terms to your billing process that allows you to automatically charge the client when the job is complete.  Except for large projects, the 2-3% fees from automatically withdrawing the cash will generally be less risk and less overall money than the risk of needing to chase cash and the actual cost of billing and collecting the bill later.

Making it easy for your clients to pay you will help prevent cash flow issues.  Accepting credit cards and setting up online payments is a great return on investment compared to having cash flow issues, chasing clients down for money, or getting collections involved.

23.Call clients five days before bills are due

Many businesses call their clients at the point that the invoice has been sent out and not been paid for approximately 30 days.  Don’t be that guy.  Call your clients 5 days before the actual invoice is due.  Make it part of your process as though it is customer service.  Check in with them.  Find out how they feel everything is going with the project or item and work towards getting a commitment for payment when the invoice is due.  It then refreshes the person’s memory about getting it paid and helps decrease the amount of time it takes for clients to pay.  If they do become overdue, be firm, focused, and friendly with them to ensure you get a solid timeline of when the funds will be paid to you.

24.Sort accounts receivable aging by amount not by days overdue or alphabetically

Every business owner knows where to go when you are looking at starting to call clients who are overdue with payment—the accounts receivable report.  It will make your life easier if you sort your list by amount.  Most programs default to sorting them alphabetically or by days overdue.  However, the bigger amounts have a bigger impact on your cash flow.  Spend your efforts chasing the large amounts down then worry about the smaller valued ones.

25.Assign a collections owner

Don’t assign collections to a receptionist or an office manager unless you have designated it as a top priority in their list of things to do and given them an adequate amount of time to fulfill the task.  Remember that office managers still have things to do outside of collections…like managing an office (plot twist, I know!).  Receptionists will need to spend time answering incoming calls, which cannot be done if they are on an outgoing call chasing down payments.

Collections is a task that most people don’t want to do.  People don’t like the guy who calls them wanting money…so who wants to be the guy that no one likes?  It is likely that no training has been given on how to be effective in getting customers to make payments and not enough time has been allocated for the employee to do this time consuming and often stressful task.  This is a common cash flow mistake that a lot of businesses make.

As a rule of thumb and to hold other people accountable for the collection process is to have the salesperson only get paid when the invoice is actually paid. This will incentivize the salesperson to make sure that his client pays you what they owe.

26.Automate collections

Utilize automation to save you time and money.  QuickBooks Online has accounts receivable management tools that will send out emails to clients as they become late and will once you have set it up, the emails progressively become sterner.  To encourage them to pay their bills, AR Collect and Fund Gates are two of the highly rated apps for QuickBooks Online

27.Sell Invoices (Factoring)

If your clients are serial nonpayers, there are still options out there for you.  There are factoring companies that will buy your invoices that help to increase your cash flow quickly.  Factoring companies usually break your payments up into two payments, and the first payment normally hits when the client receives your goods or services.  The amount is normally 80% of the invoice amount. The second payment of the remaining 20% less their fees is paid when the client pays in full.  The cost for 30 days of fees usually ranges from 1.15-3%, and the fees are normally prorated.  There are pros and cons to this method, and I would suggest researching before you make this move as not all factoring companies are created equal.

How to increase cash flow through accounts payable

28.Avoid penalties from late payments/bank statements fees

Personally, late payment is my biggest pet peeve when it comes to wastage of cash flow.  It is really a simple concept and one of the most important tax saving tips. Late payments can be easily avoided in several ways.  Get your documentation together earlier in the year to avoid the mad scramble coming up on the March 15 or April 15 deadlines.  Short-term working capital and business tax debt loans can help you cover tax payments and avoid late fees.  Filing unemployment and federal and state income taxes on time and stopping the paper bank statements that you get charged between $3-$8 for is a very quick way to stop getting fees and charges that start to add up over time.

29.Form a buying cooperative

Large corporations have better buying power than small companies, which allows them to negotiate better rates on products whether that be inventory or services.  Find companies that are like yours or use similar products or services and pool your cash together.  This will allow a small group of businesses to negotiate a better deal with suppliers who would be willing to drop prices at that point.  If you save 5% on your product, that is money that goes directly to your bottom line.

30.Use electronic payments

Use electronic payments such as Bill.com or QuickBooks payments to wait until the last moment to pay the bills.  Being able to wait until the same day allows you to plan out when to pay bills and allows you to continue to bring money in from late paying customers.

31.Implement a slow pay rule

Train whoever pays the bills to wait until the last moment possible to pay the bills.  Don’t be late with your payment, but don’t let the employee with the clean desk policy pay the bill just because it’s sitting there looking at them.  You are using up cash quicker than necessary if that happens.

32.Pay suppliers less and take advantage of discounted rates

If you have built a good relationship and are in regular communication with suppliers and pay your bills on time, you have a good chance of landing better deals with the suppliers.  Sometimes, if you pay an invoice within 10-15 days of receiving it, you may be able to negotiate early payment terms and save 2-3% off the total amount of the invoice.  Also, if you buy in large quantities, attempt to buy the products in bulk as that is generally discounted.  Shop around regularly to see who is willing to negotiate the best rates for you.

33.Lease (don’t buy)

Large assets such as machinery or equipment can suck up a lot of cash quickly if not budgeted for in the correct manner.  Leasing this equipment can save money for the business.  In the short term, it allows you to pay a set amount of money every month rather than one large deposit.  The downside of this method is that you won’t get the depreciation or the section 179 benefits as it will likely be a longer-term expense.