I'm Profitable But Have No Money!
I’ve talked to many people whose businesses are struggling with a lack of cash. Even though the company looks profitable on paper, there’s no money to pay the bills. What’s going on here?
It’s not that you’re crazy or cooking the books. Although you certainly should look at the accuracy of your accounting, it’s likely that the problem is simply the TIMING of your cash. Here’s a typical scenario: You stock up your shelves with products, and in a month a customer comes in and purchases that. Sure, you got the markup, but the problem is that you had no money at all between the time you paid your supplier and when your customer paid you. This creates a timing gap, sometimes quite significant. When you look at the monthly or quarterly results, these timing distinctions can disappear.
In a services business, a similar thing occurs. You sign a contract to do some work. Over the next month, you deliver that work, paying your employees and incurring expenses. At the end of the project, you invoice your customer, which he pays the day before it’s due. We have a gap in the TIMING of your money, which is reflected by the balance in your checking account. You’ll get your profit eventually, but may not be able to buy groceries today.
There’s several approaches to fixing this, within some broad categories:
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Delaying your expenses
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Accelerating your revenue stream
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Reducing your expense exposure
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Restructuring your business model
Here’s a few specific ideas within each category:
Delaying your expenses
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Use credit cards, but only to the extent that you can avoid paying any interest
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Renegotiate payment terms with your suppliers
Accelerating your revenue stream
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Shorten your invoice terms, and develop systems which increase the likelihood of customers paying on time
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Reward customers who pay in advance or with cash
Reducing your expense exposure
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Reduce inventory which isn’t moving quickly
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Train employees to spend money frugally and use credit cards where it makes sense
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Show employees why cash management is so crucial to business success, and reinforce the right behaviors
Restructuring your business model
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Create supplier relationships which share more of the risk (i.e. the supplier owns the products on your shelves until they get sold)
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Set contracts for delivery of services which bring in payments in advance and while the work is being delivered
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Share incurred expenses with your customers
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Renegotiate terms with significant expense factors – rent, utilities, support services, consumables
What are your best techniques for generating and conserving cash?
Carl Dierschow
Small Fish Business Coaching Fort Collins
www.smallfish.us
