How to Design an (Almost) Foolproof Cash-Flow Plan

Your cash-flow plan can be the lifeblood of your business. Learn how these business owners use their financial know-how to help their revenue streams.
December 28, 2016

If your business often runs low on money, you may have a cash-flow plan problem. (Not that you really needed anyone to tell you that.)

But if you haven't been able to figure out a way to keep a continuous revenue stream going, here are several ideas that may help you design an almost foolproof cash-flow plan. Almost? Well, hey, nothing's foolproof.

1. Take a look at your current expenses in your cash-flow plan. 

While this may seem obvious, I'd be remiss if I didn't mention it.

Lisa Chu is the owner of Black N Bianco, an El Monte, California-based online business that sells formal and wedding wear for children. She says that trimming back unnecessary expenses may have saved her company in its early days. 

"Positive cash flow was one of the biggest roadblocks for my business," Chu says. "I learned pretty quickly the importance of cash management when I had a difficult time paying my employees and the lease on the warehouse. I had to re-evaluate my expenses in order for my business to survive."

She started by getting rid of several expensive apps and other services that were nice to have, but weren't helping her company generate income. For instance, she ditched a service that made customer return exchanges and reimbursements a lot easier. While making exchanges and reimbursements easier is a good thing, her customer return rate was low, and she couldn't justify the cost.

2. Strive for 5 percent liquidity in your cash-flow plan. 

After you make payroll and pay your bills, you may want to strive to have more than 5 percent of your weekly revenue in cash reserves, advises Ken Yager, a cash-flow coach and turnaround manager for small- and middle-market companies.

"What counts as liquidity is cash in the bank, a line of credit and even a merchant credit card," says Yager, president of NewPoint Advisors Corporation, a turnaround consulting firm in Schaumburg, Illinois.

We have avoided the temptation to hire in order to fuel growth. Instead, we've let our growth fuel our hiring.

—Kestrel Linder, co-founder, GiveCampus

But, Yager acknowledges, "smaller companies will have plenty of days where the 5 percent rule is not achievable."

Still, if you shoot for 5 percent liquidity in your cash-flow plan, you may be able to stockpile money. That way, if some unexpected expense comes around, you can be ready—or if there's a slowdown in revenue, you can protect yourself.

3. Try converting customers to a subscription model. 

Do you have tons of money coming in during some parts of the year, and virtually nothing in other seasons? Your cash-flow plan can be stronger and healthier if you can spread that money around more evenly throughout the year.

Before you say, "But how do you that?" take a look at Jeb Ory, CEO of Phone2Action, a Washington, D.C.-based digital grassroots platform that helps organizations engage supporters.

Ory says that he managed to switch from most of his customers paying annually to monthly shortly after founding the company in late 2012. He needed to make several expensive investments in his first year of operations, including the cost of leasing the company's own text short code, a five digit number specifically designed for texting.

"These codes cost $12,000 to $24,000 per year and take three months to come fully active across all carriers," Ory says. "We committed $12,000 and leased our code."

To offset some of the financial pain, Ory says that his firm asked their early customers if they would pay a monthly fee instead of an annual one. He also offered customers a discount to sweeten the deal, and told clients that Phone2Action would reinvest the money into the company's services. The customers agreed, and to this day, Phone2Action still offers the same payment model.

"It's a win-win, because it locks in a cheaper rate for our clients. And it reduces the costs associated with invoicing and billing while letting us reinvest in managing the relationship and hiring developers to create new tools that benefit our clients," Ory says.

4. Be cautious with debt. 

As Yager noted, it's perfectly responsible to use a line of credit as your company's liquidity, instead of, say, a pile of cash in the back room. But consider being strategic about it, cautions Jennifer Aube. Aube is the founder of two brands, Do You Bake? and Crave It, which help consumers achieve a balanced lifestyle through nutritious foods and exercise.

"Debt. I don't do debt," Aube says. While she does have a revolving line of credit that she sometimes utilizes for her business, she uses it sparingly.

"I take only as much as I need for a specific project or expansion plan directly related to the sales growth of the organization," Aube says.

Originally, her line of credit was $5,000. "I repaid that quick [sic], picked up $7,000 and again that was paid off," Aube says. She is up to $20,000 now.

"At some point it will be cheaper to change my methodology of lending practices," Aube says. But for now, the line of credit has done what it has needed to do. It's helped Aube maintain a well-functioning cash-flow plan, without having to resort to expensive loans or putting off growing her company.

5. Hire with care. 

Kestrel Linder thinks that GiveCampus, the Washington, D.C.-based company he co-founded that helps schools reach donors and volunteers, has probably not had cash-flow issues because he's been careful about not hiring anyone too fast. A growing payroll can stunt any company's cash flow.

"We have avoided the temptation to hire in order to fuel growth. Instead, we've let our growth fuel our hiring," Linder says.

6. Take a good look at how your business is operating. 

If you want a robust, well-functioning cash-flow plan, there are three main components you may want to focus on, according to Yager. There's the time you spend looking for work, the time you spend on the actual work and there's the time you spend collecting your payment for your work.

If your company is really good at what it does, odds are, you aren't having issues with getting your work done. But looking for leads and collecting revenue might be another story.

Yager says that he has worked with companies that spent too much time working and not enough time searching for new projects, which means later, once your busy streak ends, you and your employees may have a lot of empty hours and eventually empty bank accounts to fill.

And while many retail and service businesses get compensated on the spot for products or services, plenty of companies work on credit or wait (and wait) for invoices. That's an area that can also trip up entrepreneurs, according to Yager. Yager says that he worked with one struggling client who he discovered took an average of 200 days to collect money owed to the business. Once the client made some changes to their collection methods and brought the average to 90 days, the cash-flow woes ended.

An added bonus to solving your cash-flow troubles? It can make making payroll easier. Same with investing in new technologies and better infrastructure. Suddenly you may be able to pay bills. Because a cash-flow plan problem is rarely one problem. It can be the granddaddy of an extended family of problems.

Read more articles on managing money.

Photo: iStock

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