Managing Your Cash Flow

Cash flow: the greatest managerial challenge in the custom installation business.
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Cash flow: the greatest managerial challenge in the custom installation business. Theres a simple three-step plan that you can undertake to get a better grip on that wily cash.

Step 1: Reality Check. Are you as profitable as you think? I bet you arent. Most companies in the CI business maintain their companies in QuickBooks, and rely on a cash basis for accounting. This is dangerous, unless youve got a financially savvy accountant helping you out. (Note: I havent found too many financially savvy accountants, so good luck.)

The trouble with reporting your earnings on a cash basis is one of timing. Taking a pre-payment (or deposit) from a customer and booking it as revenue creates income. But if you dont purchase goods for the project (or tie labor hours to the work) in the same month, then the income isnt offset by the corresponding expense.

Theoretically it all catches up in the end. But when is the end? Certainly everything doesnt get tidied up by December 31 unless your accountant is financially savvy (see note above). Plus, if your company is growing, your deposits keep getting bigger, muddying the waters even more.

Its tempting to pay yourself a little bonus, or buy a new F150, or hire another installer when your net profit is so high. But if the net is mis-stated, and its really lower than what your financials are showing, then youve spent money you really didnt have. So, step 1 is to find out if your profit is real.

Step 2: Look at Where Your Cash is Going. There arent too many places where cash can hide. Either you are taking it home, or its hard at work in your company. Your cash may be busy funding working capital and/or capital improvements. Working capital includes all your current assets, like cash, accounts receivable and inventory; less your current liabilitiesprimarily the money you owe your vendors.

Capital improvements include all of those high-dollar balance sheet purchases that you love to make. Like a new truck or a re-vamped demo room.

Somethings got to feed your working capital requirements, especially if youre growing. Working capital loves to eat the cash flowing out of profit. But it also snacks on increased vendor debt. The longer you take to pay your vendors, the lower your working capital requirements.
Im guessing that your working capital needs have grown out of control, and youve sucked up your profit (and ability to pay your vendors on time) because of it.

Step 3: Fix Your Working Capital Needs. You dont need me to tell you that buying the truck or the demo room sucked up cash. So I gather thats not your trouble. More likely, your growing working capital is the culprit. Remember that working capital includes your receivables and inventory. So start looking at these items first.

First, find out your average days receivable. This is the average number of days it takes your customer to pay you once youve submitted an invoice. (See Sidebar)
This means it takes your customers, on average, 31 days to pay their bills. During those 31 long, lonely days, you dont have enough money to pay your vendors. To increase the amount of cash that you have available, you will want to reduce the time it takes to collect your money. Look into automatic billing through EFT or credit cards as a simple way to get more cash fast.

Chances are that it is taking you about four weeks to actually invoice your customers for work accomplished. That means that its really taking you 60 days from the completion of the work until you receive your money.

Meanwhile, you have already paid for the labor, and you have gotten product invoices from your vendors. So start invoicing your projects as soon as the work is done.
And heres the final point: If youre carrying inventory, but you cant afford to, then dont. Sure, its nice to have stock of stuff you use on a regular basis. But if youve accumulated thousands of dollars of inventory, and you cant pay your vendors on time, then youve got too much stuff.

Were not in a capital-intensive business, like telephone companies. Were in a business where cash flows wild and free. If youre finding that youre profitable, but not able to pay your bills, its because its not flowing fast enough in your operation. Think speed!

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