The Art of Business: Go with the (Cash) Flow

Eric J. Adams

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If you’ve been in business for any length of time you know that generating a profit doesn’t necessarily ensure a positive cash flow. You could even make a compelling case that the greater the profit, the greater the risk of a negative cash flow, as money flows at a greater rate than it arrives from clients.

The risk can be particularly substantial if you’re paying out for printing, prepress, or subcontractor services with the understanding that the cash layout will be reimbursed by your clients. There were more than a few graphic designers caught in this cruel twilight zone during the dot-com crash.

So what can you do to steady that cash flow? Even if your business is small, there are steps you can take to keep out of the cash flow quicksand.

Planning for a Drought
The first thing is to see what’s what with your cash flow as it is now, and predict, as best you can, how it will look in the future. This cash-flow projection is a forecast of the difference between cash coming in the business and cash going out of the business. It sounds sort of obvious, but a projection can be a powerful management tool. In fact, many financial specialists say that a cash-flow projection is the most important of all financial management tools.

By knowing your cash position now and in the future, you can:

• Make sure you have enough cash to purchase sufficiently for seasonal cycles;
• Take advantage of discounts and special purchases;
• Properly plan equipment purchases for replacement or expansion;
• Prepare for adequate future financing and determine the type of financing you need (short term credit line, permanent working capital, or long-term debt);
• Impress lenders with your ability to plan and repay financing;
• Survive during lean economic times.

Preparing a cash-flow projection is a something like preparing your budget and balancing your checkbook at the same time. Unlike the income statement, a cash-flow statement deals only with actual cash transactions. Depreciation of equipment, a non-cash transaction, does not appear on a cash-flow statement. Loan payments (both principal and interest) will appear on your cash-flow statement since they require the outlay of cash.

The level of detail needed in your cash-flow projection will vary depending on the complexity of your business. You can set up both short term (weekly, monthly) and long-term (annual) cash-flow projections using a spreadsheet. You may even want to develop two or three “what-if” scenarios to help you manage better when the unexpected occurs.

The Small Business Administration offers extensive short-term and long-term cash-flow worksheets.

When you prepare your cash flow projections, be aware of the dangers of:

• Overstating sales forecasts;
• Underestimating costs and delays likely to be encountered;
• Ignoring historic trends or performances by clients and debtors;
• Making unduly optimistic assumptions about the availability of bank loans, credit, grants, equity etc.

Turning on the Taps
Of course, a projection is nothing more than an analysis. There’s plenty you can do to improve your cash flow:

Shorten lag time. The time that passes between the day you bill a client and the day you receive payment is called lag time, and it has ruined more than one small business. You know the drill all too well: A few clients start stretching their 30-day lag time to 45 days and then 60 days or more. You can curb lag time by providing discounts for timely payments, adding interest to late payments, and implementing an aggressive collection policy. Don’t let receivables pile up. Once goods or services have been delivered, send your bill right away. If you haven’t been paid after a month, call the client and start that arduous collections process.

Plan for contingencies. The best way to get a handle on cash-flow management is planning for the unplanned. Most business owners plan for obvious hazards, such as fire and theft, but many overlook the many other risks faced by their businesses. Consider the impact on your cash flow in the following scenarios:

• Competitive risks. What would you do if you lost your best client? Best two clients? What if your employees leave to work for a competitor? How would these events affect your bottom line?
• Market risks. What if your costs of doing business increase after you’ve signed a contract? You need more equipment, or need to hire temporarily?
• Regulatory and legal risks. What if someone sues you? Could you sustain your business while defending against the lawsuit?
• Casualty risks. What if major equipment goes down? What if your office manager embezzles money? What if your printer makes a major error and won’t rectify the situation?

Discount invoices. It’s a devil’s bargain, no doubt, but sometimes it’s the only way to get wayward clients to pay is to discount their invoices by 5, 10, 20 or even 30 percent if they pay today. Consider this a last ditch effort to collect from real deadbeats. Certainly don’t get regular clients accustomed to such deep discounts or they’ll expect it forever.

Set up a separate tax account.Cash flow crunches are never worse than at tax time, so it’s not a bad idea to establish a separate account for paying your taxes, and to segregate these funds when revenues come in. This way you’ll be ready when it’s time to file returns and pay taxes.

Other swell ideas courtesy of the SBA:

• Bill clients by credit card rather than on customary terms.
• If you do sell on terms, establish good credit policies.
• Bill promptly.
• Use aggressive collection techniques.
• Add late charges and fees when possible.
• Tighten customer credit requirements.
• Pay bills only on due date (or later if possible) unless there is a discount for early payment.
• Regulate payments to your suppliers to your advantage (spread out during the month).
• Reduce your inventory and capital equipment to the most necessary items.
• Lease instead of purchase equipment.
• Pay no more estimated taxes than necessary.
• Make bank deposits promptly. Never leave customers’ checks in a desk drawer.
• Work your cash. Put excess balances into interest bearing accounts whenever feasible (consider your short-term cash needs).
• Purchase equipment, supplies, and inventory wisely.
• Use tax losses or credits.
• Consider prudent borrowing.

And everyone’s two favorites:

• Increase sales.
• Increase prices.

Many creative professionals don’t pay attention to cash flow until its trickles to a stop. But the best way to avoid a drought is to implement good business practices when the cash is flowing like milk and honey.