Established business owners know that while sales and profits are nice, it’s cash that keeps the wheels of a company turning. This is a lesson Nathan Shackles knows all too well.
Shackles is director of sales for Racarie Software, which markets a software as a service (or SaaS) product to the human resources industry called ApplicantStack. SaaS companies, Shackles explains, often have unique cash flow challenges because their revenue comes from monthly service fees. So while each customer’s lifetime value is relatively high, the company doesn’t actually collect all the money for months or even longer.
“A typical customer’s lifetime value may be $1,000 but our monthly cash flow from that customer is only $70,” Shackles says. “So our cost to acquire new customers [advertising, marketing, commissions, etc.] is significantly higher than the revenue we collect from them the first few months.”
To accelerate cash flow, Shackles decided to sacrifice a little bit of profit later to ease his monthly cash crunch now. “I built into my pricing a 15 percent discount for customers who pay for at least three months of service upfront,” he says. “It lowers my gross revenue a little, but helps cash flow tremendously by front-loading the acquisition of cash.” So far it’s working well, Shackles says, with most of his customers now choosing the quarterly advance option and even the annual advance.
Cash Flow Can also Help You Grow
“Cash flow is like oxygen — without it, a business will die,” says Mark Kleszczewski, the chief executive officer of GoBusiness Group, a management consulting firm. “But while for some companies cash flow management is a matter of survival, for others it can free up cash to take advantage of opportunities that don’t typically occur during flush times.”
Where do you look to find cash? John Barrickman, the president of New Horizons Financial Group, a financial consulting firm, says that “the starting point must be determining where cash is currently tied up.”
He recommends reviewing your balance sheet and identifying items like excessive fixed assets, nonproductive cash sitting in multiple noninterest-bearing accounts, unrecognized costs and inventory, and uncollected accounts receivable. “This represents a large lake in which huge amounts of cash can be trapped.”
Next find out where your cash comes from and where it’s going. “The best tool to help you do this is your cash flow statement,” says Barrickman. “It will help you answer two key questions: What is causing more cash to go out than come in? And what can you change that will flip this equation so that more cash comes in than goes out?”
According to Julie Murphy Casserly, a wealth management adviser and author of The Emotion Behind Money, “Today is the time for owners to get really clear as to what their true business priorities are and create financial space in their cash flows. Items and expenses that were important two years ago may not have the same priority now.”
She advises her business clients to ask themselves a tough question: “Does this expense support my dreams, desires, and business plans for the future? If it doesn’t, get rid of it and shift those dollars you’re saving to build up more cash reserves. I find so many business owners stress about meeting payroll because they haven’t built up at least 12 months of cash reserves. This is a great opportunity to do so.”
Improving cash flow management doesn’t have to be complicated. Orit Pennington, the owner of TPGTEX Label Solutions, uses QuickBooks to manage her company’s cash flow.
“Our very basic cash flow tool is to enter all future transactions [going forward at least two weeks] in the check register. This gives us a real look at how much money we will need. We then look at our accounts receivable and put those figures up against our cash going out. It’s simple but it works, and it’s not hard to keep up with.”
Pennington says she does projections based on average sales and expenses to see where the company needs to be financially. “We know what our normal expenses are and we put those against potential revenue to see if we are going to reach our mark. If for some reason we do not see active sales, we start looking harder into what else we can do and how we can get sales going.”
Shackles also believes in the simpler-is-better approach to cash flow management. “I’ve built an Excel spreadsheet model to project cash flow based on historical click-through and conversion rates from my Internet and PPC advertising. I use this to determine how much I can spend on Web advertising each month. This helps me maximize the number of new customers acquired while staying within my cash flow parameters.”
To boost cash flow, Barrickman suggests looking for ways to expedite the processing of receipts and accelerate the collection of receivables by using your bank’s lockbox, remote deposit capture, or ACH electronic payment services. “Banks offer a broad range of treasury management services to help businesses increase their available cash,” he says.
Kleszczewski recommends auditing your billing and collection processes to help juice cash flow. “Bill early and often. When receivables turn over faster, you’ll have more money available to spend on the business. Review the timing of invoices and run an accounts receivable aging report every week. Better yet, go digital and use automated flagging systems built into your financial software so you can act immediately on overdue accounts.”
The flip side of billing and collections is payables, which Kleszczewski urges business owners to stretch out as far as possible. “Don’t jeopardize a strong working relationship with a client, but where possible take the maximum amount of time available to pay your suppliers, which can sometimes be up to 90 days or longer. This is like an interest-free loan, but from a supplier instead of a bank.”
Maintaining strong cash flow is beneficial for many reasons, he adds: “It reduces the amount of capital needed to support growth and lowers risk by reducing a company’s dependence on external funding sources. Consistent cash flow also increases predictability in your business model, which makes it easier to manage and plan for growth when better economic times return.”