by Stephen Pape

Cash is the fuel that keeps a business running. Forget about managing cash flow and the business will come to a screeching halt. Like a good driver who keeps one eye on the fuel gage, cash management is knowing where the money goes, how to keep what you have earned, and how to avoid common spending traps.

Managing cash flow means monitoring the following indicators:

Accounts Payable
This is money you owe to suppliers. Usually you must pay within 30 days. It is tied closely to inventory management, because buying more material than what you can use in a short period means your money goes out before you get paid. Take advantage of payment terms offered by suppliers. Don't use cash, checks or debit cards at the time of purchase. The money comes out of your account right away.Even using a credit card delays payment for a month, but to avoid interest charges pay in full when the bill comes due.

Accounts Receivable
This is money owed to you that should be paid within a definite period of time, usually 30 days. Consider increasing your regular selling price and then offering a cash discount for customers that pay immediately, or within a shorter period of time. Also, get customers who do not pay immediately to sign an agreement in advance that they will pay you in full, and also if delayed, they will pay all interest, penalties and collection costs as well. On larger contracts, build in draw schedules so that there is no guess work about when payments are to be made and that insures that everyone knows that the performance of certain tasks means a scheduled payment is due. Waiting until work has begun (or is completed) is way too late to start clarifying draw schedules and payment terms.

Inventory Management
If you are in a metropolitan area with multiple suppliers and good transportation, you might not need to tie up as much of your cash in inventory as a business out in a rural area far away from all the suppliers. Federal Express and UPS run everywhere these days so even in remote areas inventories don't need to be as large as in the past. As a general rule, don't carry anything more than you have to unless you are getting a really good price reduction for buying before hand.

Capital Expenditures
This is where many people make their fatal business mistake. These are decisions on land purchases, major equipment purchases, buildings and tools. Use extreme caution on making long term commitments for new buildings or equipment. If you are not careful, you will sink the funds you have built up in all the other areas into this category and then be forced to leave it all for some bargain hunter to come along and scoop up your dreams at a fraction of your original costs. Also, don't replace things just because they are fully depreciated. A truck, which might depreciate in 12 to 24 months should provide good transportation for 48 months or longer. Depreciation is good if you have to buy something but it is not reason enough to make a purchase that otherwise would not have to be made. If you need tax write offs, you can always give your money to a charity or invest in the stock market.

Overhead
This is one area where we may have nothing in common with our competition. If we can keep this factor lower than our competitors, then we can outlast them. Basically we need to remember that the people in the field producing income should not be considered overhead. Labor overhead is all the friends and family members we put in the office, who do not actually produce income. So, if you suddenly realize you are paying too much for overhead and decide to cut back on your costs, be sure and cut back in the right place or you could do even more damage than good.

Labor
This involves decisions on hiring new workers, deciding how much to pay them and what benefits to provide. It also involves decisions on training, and deciding how much overtime is allowed before you add more employees. Note: Showing a level of appreciation for employees can go a long way towards making up for deficiencies in other areas with very little impact on cash.

Pricing
No two companies are the same. Pricing should allow you to recover all your expenses and make a decent profit. Each company must decide the proper pricing for their services. If you are too high, you need to adjust your expenses before reducing your selling price or the bottom line will suffer. Probably one of the quickest ways to fail in a service business is to simply set your pricing to be a little less than your competitor.

Cash management requires active monitoring and adjusting factors on a timely basis. Operating a business can be rewarding, challenging, and enjoyable all at the same time if you do a good job of cash management.

 

About the author:

Stephen Pape is the General Manager of Pape Air Conditioning and Heating Service Company in DeSoto, Texas. He is active in the Air Conditioning Contractors of America and has served as a Director for both the Texas State and North Texas Regional ACCA Chapters. He holds a BS degree from Southern Nazarene University and an MBA from Texas A&M-Commerce.

Stephen Pape