If you've ever found yourself lying awake, wondering how you're going to make payroll or pay your own mortgage, you've probably struggled with cash flow problems in your business—perhaps because you didn't have a cash flow plan.
Cash flow—the term for the money that comes in and out of a business—can put a damper on any entrepreneur's day or night. You might have invoices with thousands (or even tens of thousands) of dollars. But if that money isn't in your bank account and doesn't appear to be arriving any time soon—and you have thousands (or tens of thousands) of dollars in expenses to pay now—that's a potentially business-ending problem.
But while cash flow is a dilemma that is fairly easy to diagnose—far more money is leaving the business than is coming in—determining the reasons for why you're constantly running out of cash and coming up with a cash flow plan may be harder. After all, you may be so busy fulfilling orders, selling products or servicing customers that you haven't had much time to dwell on exactly why the money isn't pouring in like it should. But if you're trying to create a cash flow plan to keep your business going, you may want to ask yourself if any of these three scenarios are occurring.
Cash Flow Plan Roadblock #1: Your Clients Aren't Paying You Fast Enough
Bryan Clayton, now the CEO of GreenPal, an app that connects homeowners to lawn-care companies, once owned an $8 million landscaping firm with over 100 employees. He recently sold it in part because of cash flow problems related to companies paying him later and later and later.
"We worked for mainly large-scale commercial clients who take pride in stretching out how long they can take to pay their vendors," Clayton explains.
How long did they take to pay? "In most cases, 60 days and even 90 days," he says. "I can't tell you how many sleepless nights I've had wondering how we were going to make a payroll on Friday."
Possible solution: Shahara Wright, a business law attorney and business strategist in Houston, Texas, says that she works with many small businesses that have cash flow issues. Wright suggests that you may want to see if you can tweak how your customer pays. For instance, one of her clients owned a furniture consignment store that was struggling with cash flow because they let customers take the product now and pay later.
Sure, the furniture store could have stopped doing that altogether, but it would likely have meant losing sales to all of the competitors who were allowing customers to finance their furniture. So Wright suggested that the client continue to let customers take their furniture, but that they modify some of the payment terms. "We changed the customer payment schedules, required a larger down payment and shorter payment periods. This worked, and we were able to increase the cash flow of the business," she says.
—Jesse Harrison, CEO, Zeus Legal Funding
Cash Flow Plan Roadblock #2: Your Invoicing System Isn't Up to Snuff
You probably don't want to hear that maybe it's your own fault that you have cash flow problems, but that may be the case. Or maybe you're making an already dicey situation worse.
Jesse Harrison, CEO of Los Angeles-based Zeus Legal Funding, says that cash flow has been a problem for him, particularly in the early days of his company, which was founded in 2013.
"When we first started, we were so busy setting up the business that we did not have a reliable invoicing system in place," he says. "Everything was entered manually. At the end of the year, I found that even though I felt like we were making a profit, the numbers were showing otherwise. I found out that we had forgotten to invoice and charge many clients. When we implemented a fool-proof accounting system, this problem was resolved." Think about that. If you've ever found a rogue invoice that you've never sent, you effectively were working for free.
Possible solution: As part of your cash flow plan, consider changing how you collect money from your customers. How and what to fix with your invoice system depends on what may be wrong with it, but Terence Channon, managing director of startup business incubator SaltMines Group in Vero Beach, Florida, says that whatever you do, don't be bashful about going after your money.
"Some business owners are scared of rocking the boat. Don't be," Channon says. Sure, this is easier said than done, especially if you want to work with this client again and don't want to chase him or her away. But use common sense: You don't have to threaten a lawsuit or tell a client that your cousin Knuckles may be dropping by for a visit. Ask professionally and politely for your money if it's past due, and if your client really takes his or her sweet time paying you, then you may want to consider asking more frequently and insistently. At this point, this may be a client that wouldn't be terrible to lose.
Channon suggests you also bill as soon as possible or at least multiple times a month versus waiting until, say, the last day of the month. You may even want to consider offering a 2 percent early-pay discount or impose penalties for bills that are late.
Cash Flow Plan Roadblock #3: Something in Your Company's Infrastructure Delays Payments
During the second year in business, Harrison discovered a second problem that was hurting his cash flow.
"We recover our money only if a lawsuit is successful—in other words, only if it's decided in the plaintiff's favor," he says. "If a lawsuit is not decided in the plaintiff's favor, we do not recover the money that we lent,"
In other words, his company is a little like an insurance company—it's a firm built on taking risks.
"Our case analyst was being too liberal and approving virtually everything," Harrison says. To improve his company's cash flow plan, he hired two more analysts. Now two out of three of the analysts have to agree before a case is approved. It hasn't completely wiped out the cash flow problem, Harrison says, but it has helped.
Even if your business always brings in revenue at the point of sale, you could be wasting money in a variety of ways, from having too many employees working at once or overspending in a certain part of your business or making unnecessary purchases. Any of these may eventually impact your cash flow.
Possible solution: Analyze how your business is operating. You may especially want to look at anything that affects your company's bottom line.
"I've found that many small-business owners struggle with cash flow due to a lack of awareness about how they are spending their money," says Billie Anne Grigg, an accountant and owner of Pocket Protector Bookkeeping in Chelsea, Oklahoma. She adds that the timing of when your cash is going in and out is important, too.
"A business owner may have a very good week income wise, look at their bank account, see they have a certain amount of cash available and then use this cash to either pay bills or purchase new product for their business," Grigg says. "They fail to take into account they have a payroll due the following week and are caught by surprise."
So whether you work with an accountant or a business software, or you start looking for financial waste yourself, you may find some wasted money. And if you can create a cash flow plan and plug up those holes where wasted money is pouring out, you might keep your business afloat a little longer until those checks do start pouring in.
Read more articles on cash flow.