A few more words about cash

I’ve posted a lot about cash in the past, mainly about how important, misunderstood, and difficult cash flow management is to the success of a business. It can be shocking to see how increased sales without cash will kill a company while flat sales at decent margin can be a huge position of strength. Believe it or not, a million dollars in sales at 10% margin on Net 60 terms might be AWFUL news while $50,000 in sales at 2% margin on COD terms can be AWESOME.

The most misunderstood concept with regard to cash and cash flow is TIME. I used to think that healthy A/R and constant business meant that our business was in good shape. Problem was, there never seemed to be any money on hand and you can’t take a P/L to the pulse machine.

The obvious answer is to get your customers to pay on time, even early. You can offer a discount if they pay in 10 days instead of 30, for example. The next answer would be to get better terms from your vendors; instead of paying COD ask for Net terms. Or get a credit card and wait til the last minute to pay, etc.

Any consultant or bookkeeper is going to bring up (1) getting better terms from your vendors and (2) getting your customers to pay faster. Gee, thanks for the advice.

Problem is that everyone is playing the same game – your vendors are trying to get you to pay faster while delaying payments to their vendors who are doing the same thing, over and over and over. So what are you to do? Well, here are some things that have helped our company….

1. Ask vendors with whom you have a good relationship for a low, Net 1 credit arrangement. When you order $100 worth of widgets from them, call the next day and pay it over the phone with a credit card. While this doesn’t do anything for your cash flow issues since you’re still basically paying COD, it DOES create a powerful reference for you. When asking for credit from any vendor, the first thing they are going to ask is who else is currently extending you credit. Being able to tell them SOMETHING is worth the small amount of trouble it takes to get a few NEt 1 accounts set up.

2. Get a short term Line of Credit with the bank. Predictably, banks typically want to loan money to companies that don’t need it. They make safe bets to make sure that the money is coming back and safe bets are most often made on companies without cash flow problems. But having a good relationship with a bank is a great idea and its never too soon to get started. My suggestion is to find a banker and bank you like and try to get SOMETHING from the bank. A $5,000 line of credit that matures in 6 months, for example, would serve a few purposes: first, it shows you the rigors of getting money from a bank. You’ll learn a LOT about financial statements, business planning, forecasting, etc. as soon as you start working with a bank to get a loan. Second, if the bank makes a bet on you for a small amount of money and you pay them in full and on time, they will be much more agreeable the second time around. Rinse and repeat a couple of times and you might find yourself with an 18 month revolving line that essentially makes your cash flow problems a thing of the past.

3. Most importantly: Learn to calculate. Let’s say a COD vendor is charging $1 for a product and a Net 30 account is charging $1.10 for the same product. You are going to sell 1000 of these for $2.00. And let’s say your customer will pay on time, Net 30. Using your net 30 account would cost you $100 for the month. Not using it costs you access to $1,000 for the month. So you have the option to spend $100 to keep $1000 in the bank. Whether or not this is a good deal is up to you (and really not the point here). What is important is that you know what your “Cash” costs you and how to make it work in your favor.

Cash flow is a problem in all businesses. Even the ones that have plenty of cash worry about what to do with it, whether to horde it, use it to grow, etc. The truth is you are NEVER going to be free from cash flow concerns as long as you have your business. The key is to understand what does and does not work for your business and to give yourself options.

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