Tips to Keeping Your Cash Flow Positive - ResidentialSystems.com

Tips to Keeping Your Cash Flow Positive

We have taken several steps to maximize our financial position in the past few years, aside from trying to improve product margin and employee utilization, both of which are obviously paramount to profitability. But as we’ve seen with many companies over the years, managing cash flow is critical.
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With the end of the summer slow season upon us, I have taken some time to really focus on our accounts receivable to be sure we are collecting on a timely basis.

One of the challenges of this industry is that there is a lot of expensive equipment that goes into a project that can take many months to complete. All it takes are a couple of slow paying clients on large jobs, and your cash reserves can get pretty tight. We have taken several steps to maximize our financial position in the past few years, aside from trying to improve product margin and employee utilization, both of which are obviously paramount to profitability. But as we’ve seen with many companies over the years, managing cash flow is critical.

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Our first priority is to set and maintain payment schedules with clients. For example, we require a 5-percent deposit at the time of contract signing and payment in full for all product before we order it. In a worst-case scenario, we should be at close to break even if a client doesn’t pay beyond that point. And if they have been paying promptly up until then, they are less likely to be difficult later. We’ve already weeded a lot of the slow and non-payers out of the mix because we don’t start without these payments. If someone is slow to pay on the product order, then that gives us a good heads up that we need to be sure to collect payment on future steps ahead of time as well with the client.

We also take credit card numbers and charge for proposals and service calls before sending someone out the door. It took a lot of getting burned on proposals and small service calls (particularly when not for existing clients) before we instituted this, but it has ensured that even for these low profit endeavors, we at least collect the token sum that we bill out.

Those two items really helped with accounts receivables, so we have also turned to accounts payable. With several of our manufacturers, we were paying bills as they arrived, not taking advantage of credit terms or credit cards. If a manufacturer gives you 30 days to pay and then you put the payment on a credit card (that is paid off in full every month), you get 50-60 days to pay the bill, giving more time for customer payments to come in from the job. Not only that, but when you use a credit card you can take advantage of either cash back rewards or travel rewards. If you put just $50,000 of charges on a card each month, then that is 600,000 points a year. I have a close friend who hasn’t paid for a hotel room or airline ticket for he or his family for 10 years, and he takes amazing vacations.

I’ve also tried to take advantage of manufacturer volume purchases. You know the call you get near the end of the quarter or fiscal year to get an extra 10-15 percent discount if you buy $5,000, $10,000 or $25,000 worth of product? I used to jump on those all of the time, but too many times I have been left holding inventory that ended up being obsolete three to six months later, or because we are such a small staff, the stock wasn’t rotated correctly, and now I had inventory that was out of warranty. Or maybe our business was cyclical, and we’d been doing a lot of HDMI matrices so I stocked up on those and then that business dried up a little bit. It can be hard to accurately forecast inventory needs, especially for large ticket items.

What do you do to ensure your cash flow stays in the black?

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