The Contra Costa County Small Business Community

Got Cash Flow? (Part 2 of 2)

July 20th, 2009

Copyright © 2009 Integrated Profitability ^TM

In the article before our regular blogging got interrupted with “Breaking News” (“Got Cash Flow? (Part 1 of 2)”), revenue and expense information was gathered in order to figure your company’s cash flow.  For revenues and expenses, the method of payment was highlighted because it provides insight into ways to improve cash flow.  Here is what the table of information might look like:

The order of the “payment method” is from immediate-cash to much-later-cash.  For your business, fill the chart in, adding and taking away payment categories to fit the way your company operates.  As you fill in the information, jot down estimates of how long each payment method takes to convert to cash.  For revenues, that is how long you are financing (carrying) your customers.  For expenses, that is how long your suppliers and creditors are financing you.

As you compile these numbers, do you notice any changes happening over time?  Unfortunately, the time it takes revenue to convert to cash naturally increases, while the time it takes expenses to be paid in cash decreases.  If both of these trends are happening in your business, your cash flow is getting doubly squeezed.  If your cash flow is getting squeezed too hard, let’s talk.

In the meantime, here’s a generic approach to assessing the state of your company’s Cash Flow:

Cash Flow: Revenue (Actual)

July 6th, 2009

Copyright © 2009 Integrated Profitability ^TM

This is the third in the “Cash Flow: Revenue” string of articles and the focus is on ideas to increase Cash Flow on a permanent basis.  The first two articles covered temporary, timing ways to increase Cash Flow (“Cash Flow: Revenue (Timing)”) and the grey area between timing and actual improvements (“Cash Flow: Revenue (Grey Area)”).

As mentioned in “Cash Flow (Intro),” the only way to permanently improve Cash Flow over the long-haul is to widen the spread between Revenue and Expense (where both are on an “All-In,” net basis).  As long as net-revenues (converted to cash) are increasing faster than net-expenses (paid in cash), the company’s cash flow is improving.

(Note: there are specific relative trends that can cause cash flow to behave counter-intuitively, but we’re going to ignore those for now and perhaps pick them up at a later time.)

How to increase revenue is an age-old question facing businesses, and the full topic is far beyond the scope of this article.  While the thoughts below are limited specifically to the revenue side of the Cash Flow equation, the steps are very similar to those taken to increase sales and revenue overall.  Here’s the first one:

Number Games

July 2nd, 2009

Copyright © 2009 Integrated Profitability ^TM

Any blog on finance and profitability must deal with numbers.  Which can be tedious and boring.  One of the main points behind the “Small Business Finance & Profitability” is that owners and other stakeholders in the business need to actively understand those numbers: which are reporting the direction and health of your business.  You can hire others to do the tedious chores, as long as you hire trustworthy and conscientious people.  But what can never be sub-contracted, at least not without major risk, is the knowledge of what the numbers are telling you.

An earlier blog, “Numbers People,” provided an introduction to types of jobs and careers that are involved with company numbers.  At the end, it was stated that some functions should be separated to some extent as a matter of prudent “checks & balances.”

Here’s an example from a large company.  Let’s say the company is experiencing a squeeze on profitability because of a very tough market.  Sort of like the one we are in right now.  Further, a mandate comes down from management that the whole company has to cut expenses.    

Cash Flow: Revenue (Grey Area)

June 29th, 2009

Copyright © 2009 Integrated Profitability ^TM

In “Cash Flow: Revenue (Timing),” we covered ideas on how to improve revenue by making changes in the timing of the receipt of cash.  The last example in that article, about influencing the type of payment mode customers use when making purchases, was crossing the line from temporary timing changes into permanent cash flow improvements.

There is a grey area between “Timing” and “Actual” ideas when it comes to improving Cash Flow.

For example, if credit cards cost 5% on average to convert a sale into cash, you might consider offering a discount if the sale is paid for in cash.  In this example, a 2% discount would provide a good benefit.  Some businesses already do this.  Traveling around the country, there are gas stations that differentiate prices based on whether one is paying with cash or with credit.  As far as your business is concerned, it all depends on the paying-willingness and flexibility of your unique customer base.  How to go about it?

Cash Flow: Revenue (Timing)

June 22nd, 2009

Copyright © 2009 Integrated Profitability ^TM

As mentioned in “Cash Flow (Intro),” the only way to increase cash flow consistently in the long-run is to ensure that revenues are growing faster than the underlying expenses.  For this to happen, “net revenue” is what counts: gross revenue (e.g., sales made) less discounts, processing fees, rebates, returns and anything else that prevents the sale from getting converted into hard cash that you can hold in your hand.

For both revenue and expense, there are two ways to improve cash flow:

● timing changes

● actual changes

The first primarily helps temporarily.  The second helps permanently.

For revenue, timing changes help cash flow when the receipt of incoming cash is accelerated; actual changes help when incoming revenue from business activities increases. Focusing on the revenue portion of cash flow, here are some ideas:

Timing:

● Tighten up terms of payment for your sales (examples follow)

● Shorten the amount of time between billing the customer and receiving their payment.  Most companies list standard terms on their invoices, stating how long the amount has been outstanding and at what point finance charges kick up (e.g., after 60 days).

● Add finance charges to late paying accounts

The BIG Question

June 4th, 2009

Over the past two months, we’ve covered the basics of profit and profitability.

We’ve touched on the concept of profit and how to calculate profitability.  We’ve looked at the two components that drive net-profit: revenue and expense.  Examples have been taken from the Contra Costa Times relating to current examples of each.  And we touched on how individual businesses are part of a vast world that impacts commercial success, or not, every day throughout the year.

Now’s the time for the BIG QUESTION: how does all this high-level, definitional “stuff” relate to you?  To paraphrase Rob Zazueta, the owner of TechKnowMe ^TM: “let’s cut to the chase.”

What is your business’ Net-Profit?  More importantly, what is its trend?  Is it going the way you want it to?  Like the stock market, there are only three choices: up, sideways, down.

Everybody likes good news, so let’s say it’s going UP.  Great!  That’s fantastic given the current state of the economy.

What’s driving your higher net-profit?  Is it increasing revenue?  Decreasing expense?  A combination of the two?  What opportunities do you have to increase net-profit even more?  What issues or problems do you need to work on to continue increasing your net-profit?