MANAGING CASH TRICKLE "Cash trickle? You mean cash flow, right?" My brother, Jim, asked me. I stared back at him and said, "No, unfortunately for me, I mean cash trickle. Things have been kind of ugly lately." I took another sip of my beer and thought about crying into it. Nah, not very manly. I'll wait until I get home and then when no one is around, then I'll cry. But let's come back to this sad scene later. Virtually every small business goes through periods of time when customers pay slowly and cash is at a premium. In many cases, companies work themselves right out of business by failing to manage their cash flow properly. Sometimes, businesses are extremely profitable "on paper" but cash flow is so bad that they literally run out and have to close the doors even though they are profitable. It's a strange paradox of business that too much success can actually kill you. So what is it that causes cash flow problems? Sometimes it is as simple as spending money too fast but more often it is a combination of events that brings about slack cash times. For example, if you have a service business that bills customers once monthly, you are often performing services for customers during the first week of a month but not getting paid for that effort until the last week of the following month. In the meanwhile, if you pay employees twice monthly, you've had to meet 3 or possibly 4 paydays before then. Even if you bill immediately after service, most customers will insist on 30 days for payment so you still have multiple paydays to meet before pulling any cash in. Another key cause of poor cash flow is rapid growth. If your business is growing rapidly, say 5% month over month, you will be adding employees and running into new expenses that will drain more cash than usual. Combine that with the billing lag time and/or slow paying customers and it's a recipe for disaster. SmallBiz Rule #16: As an owner, there is no higher priority than managing your cash flow properly. Even "all cash" businesses can experience cash flow problems. Business owners who pay themselves too much or who spend too fast on "frills" can find themselves facing the trickle rather than the flow. Of course, there is another scenario that leads to poor cash times for a company. Failing to make a profit will do it every time. Losing money each month will eat away at your reserves and eventually lead to your demise. So, does owning your own business sound like fun yet? Let's go back to that conversation between my brother and me. It was the mid 1980's and my business was barely breaking even. For those of you who don't know, breaking even is just a slower version of death. It will kill you as surely as losing money will so you really have to attack the problem. It was over that beer with my brother that I formulated my plan for survival. I won't bore you with all the nitty-gritty details but essentially it was the following: 1) Do not spend any money on anything that doesn't generate more revenue. Don't buy any frills for the office; cease all ineffective advertising; don't add any more long term financial commitments no matter how enticing the financing plan is. 2) Try to improve profit margin so I can secure a line of credit with the bank and 3) Manage cash flow better: Cut my own pay; pay my vendors just a tad more slowly; add personnel sparingly; bill quickly and/or more often; raise rates where possible and track my DSO's more tightly. DSO's (Daily Sales Outstanding) are very much the key. You compute your DSO figure by taking the total billed sales for the month, dividing that into your total Receivables figure and multiplying the answer times 30. That tells you how many days it is taking for you to collect your average customer payment. For example, if you billed for $50,000 in March and at the end of March your total receivables were $72,000, then 72K divided by 50K equals 1.44. 30 times 1.44 is 43.2 so it's taking you a bit longer than 43 days to collect your average bill. Every industry has its own standards but generally it's a good rule to aim for somewhere around 40 days. Much longer than that and you are basically giving your customers an interest-free loan and, guess what, you probably can't afford to do that! Tightening my belt and focusing on managing my cash flow saved my business but, (and here's the part where you might want to shield your eyes) it took me nearly ten more years to reach a comfort level. Small business isn't just a job, it's a way of life. You either embrace it or it kills you. Embrace it!