Manage Your Cash, or It will Manage You

Companies typically don’t go out of business because they lose money in a month, or a quarter, or for the year. They go out of business because they run out of cash. It can just as easily happen to those companies who are making a profit. These operators sometimes lose sight of the fact that cash flow and showing a profit are not the same things. As Joe Becker would always say, “Cash is king!” And he was right.

The cash burn begins the moment you get the order. Paper and materials are ordered, and the labor costs begin to mount. Payroll must be met on a weekly or biweekly basis and the paper bills are typically due well before you get paid. So yes, you act as the bank for your customers by fronting this cost. You may have a five-day production window and then you’re sending the invoice within 24 hours of shipment. At best your client pays in 30 days, but more likely it’s 42-45 these days. That means that you get paid around day 51 – weeks after you’ve paid payroll and 20-30 days after you’ve paid for paper. The printing “bank” in action.

Here are two ends of the spectrum. When companies are in a fast growth mode, the cash inflow doesn’t happen any quicker, but you are doling out more money for paper and materials and labor. The other end of the spectrum occurs when business slows, and the cash inflow isn’t enough to sustain operations.

Things that you can look out for to help manage your cash. First, begin with having an awareness of your cash flow on a weekly and monthly basis. Anticipate customer payments and outflows of cash so that you can manage appropriately. Awareness, and monitoring the situation are key to understanding where your cash is going.

Look to extend trade credit when you can. Even extending payments by several days can help your cash situation. If you’re not getting invoices out within 24 hours of shipment, identify and eliminate the obstacles that are preventing that from happening. A systematic follow-up procedure for all invoices is recommended. This can simply be emails going out to confirm receipt of invoice and a reminder of the due date. Don’t wait until invoices are due to follow up again. A friendly reminder that payment is due within seven days can help speed up getting paid.

The relationship you have with your bank has never been more important. With lending tightening up, and the banks being weary of lending, make sure that you are in good standing with your lending institution. Having a line of credit that is appropriate for the size of your company, and your growth rate is critical in managing the fluctuations of your cash flow cycle. Remember, however, that the line of credit is for fluctuations in cash, and not to support a non-sustainable business model.

Cash is king and remaining liquid can provide you with many opportunities and freedoms. Understand and manage your cash cycle and look for ways to decrease the amount of days that you are acting as a bank. Whether you are profitable or not, you can still run the risk of getting into a tight cash situation. Do not overlook this, make it a priority to be aware of your cash situation. Negotiate extended terms with your suppliers as best you can. And don’t overlook the impact of getting those invoices out within 24 hours of shipment. Send those invoices out and have a systematic method for following up and getting paid in a timely basis. Finally, make sure that your banking relationship is where it needs to be and that your line of credit is at an appropriate level for your business model.

If you have any comments or thoughts as to how you’ve approached these issues, please send me a note, or include them below.

Mike Philie can help validate what’s working and what may need to change in your business. Changing the trajectory of a business is difficult to do while simultaneously operating the core competencies. Mike provides strategy and insight to owners and CEOs in the Graphic Communications Industry by providing direct and realistic advice, not being afraid to voice the unpopular opinion and helping leaders navigate change through a common sense and practical approach. Learn more at www.philiegroup.com, LinkedIn or email at mphilie@philiegroup.com.