Nine powerful techniques to help your bottom line.
By William J. Lynott
Cash flow—how much money is flowing into and out of your groundwater business—is an easy concept to understand. Still, not every owner is aware of the major impact skillful cash management has on net income. Mainly because the importance of managing revenue is far easier to recognize in some types of businesses than it is in others.
Take home construction for example. When a builder takes on hundreds of thousands of dollars in short-term debt to construct new homes, it’s obvious they must generate a substantial positive cash flow in a hurry if their business is to survive.
Of course, the situation is not quite as dramatic for most people working in the groundwater industry. But skillful cash management is critically important in every form of business activity—from the most modest to the largest.
Losing control of money has generated more financial headaches for small-business owners than temporary red figures on the bottom line. Conversely, a sensible cash management system can provide a comfortable and profitable cushion during both good times and bad.
Here are nine powerful techniques that can help you to smooth out your cash flow and improve your net income right now.
1. Keep every income dollar working for you.
Just as the big boys in business do, it’s important for you to put every revenue dollar to work as soon as you get it.
Here’s an easy way for you to do that. If you don’t already have one, open a money market account at your bank and ask to have it linked to your business checking account. That will allow you to make transfers by phone or online between the two accounts.
Then, deposit all—yes, all—your daily receipts into the money market account where they will immediately start drawing interest.
Never deposit receipts directly into your checking account. Keep a minimum balance in the checking account and transfer cash by phone or online only as needed to cover any checks to be written.
The banks have made this cash management technique so easy to use there’s no reasonable excuse not to use it. While even money market interest is anemic now, interest rates are set to start climbing soon—and you’ll be ready to benefit when they do.
2. Don’t be in a hurry to pay your bills.
There’s a good reason why checks are slow to come in from most people who owe you money. Just like them, hanging on to cash as long as possible keeps money available to work for your business.
That’s why it’s important for you to set up a system that allows you to pay your bills just before they come due. It’s an easy thing to do and moves you up another rung on the ladder of professional cash management.
Of course, you don’t want to jeopardize your credit standing by paying bills late. Pay your bills just before they are due—not well before, not shortly after. It is especially important to avoid late payment on credit card bills because of the oppressive penalties most banks have in place these days to penalize the careless among us.
3. Be aggressive collecting accounts receivable.
If you do any of your own billing, you must never neglect your accounts receivable. You’ve earned that money. You have a right to that money. You need that money.
Chasing a late-paying debtor may not be your favorite pastime, but setting up an accounts receivable file and following through on late payments is as important to your financial success as is the professionalism of your service. If your customers learn you are cavalier about money owed to you, you can be certain they will stretch your patience—and your cash flow— to the limit.
4. Maintain a cash cushion.
Try to keep enough cash in interest-bearing accounts to cover normal operating expenses for three to six months. While that’s not always an easy thing to do, it can provide invaluable peace of mind and self-confidence when revenue is down during business slowdown. Also, keep in mind your cash cushion is silently making money for you in those interest-bearing accounts.
5. Develop a personal relationship with your banker.
Handling money is a banker’s job, and most of them are good at it. While many small retailers would prefer to keep financial matters “close to the vest,” it’s a smart idea to develop a personal relationship with the manager of your local bank branch. Make an appointment to discuss your financial picture honestly. You’ll likely get some good ideas and a favorable ear should you ever need a little help.
6. Let your computer help you manage your cash flow.
Whether you use one of those heavyweight software packages, or you use Quicken or Microsoft Money on a desktop PC, trust every aspect of your business affairs, including business and personal investments, to your computer. The financial reports and analyses modern software can produce at the touch of a button can be vitally important management tools for improving cash flow and bottom-line profits.
The most popular software packages designed for small business are infinitely easier to use than they were as recently as a few years ago. More important, they will teach you in dramatic fashion how much you can benefit from a sensible cash management system.
7. Consider leasing.
Most financial advisers agree leasing products like cars or trucks for personal use is usually not financially advantageous—but business is a different animal entirely.
“The nature of business accounting is such that leasing can be the most sensible approach to many types of capital investment,” says professional accountant Jay Blumenthal of Abington, Pennsylvania. “It usually makes sense to lease if you will be able to use the cash in your business activities or in your investments to earn a better return than the cost of leasing.”
If you are able to charge out any part of the operating costs for your automobile or truck to your business, it may pay to consider leasing instead of buying. Talk to your tax adviser about this the next time you’re considering any capital purchase for the business.
8. Spread the gospel.
To do a professional job of managing cash, you must have a steady flow of the stuff coming in. Unfortunately, many small owners keep themselves so busy taking care of the day-to-day work they never get around to putting together an aggressive marketing program to build the business.
That’s a serious mistake. Marketing is an essential ingredient in the recipe for growth— even survival—for anyone who is involved in business activities. Yet, many owners shy away from all but the easiest and most obvious ways to promote their sales.
Some time, some place, some water well system professional may have bought the necessary equipment and sat back while the phone rang off the hook and customers lined up.
Perhaps, but not likely.
To build a growing and profitable groundwater business requires an ongoing marketing program. There just is no other practical way. Competitive prices alone won’t do it. Professional salesmanship alone won’t do it.
As one entrepreneur puts it, “You have to tell the world your story. If you don’t do it, no one else will.”
9. Consider firing your bank.
Chances are you have been a victim of merger mania at least once. That’s when you wake up one morning to find out the bank you have grown comfortable with is no longer around. It has merged with a strange new bank that promptly laid claim to your business.
Will this new bank, which is larger than the gross national product of some countries, treat you better? Will this new bank exercise economies of scale in order to bring you better and less expensive services?
Not likely. Experience is showing some of the huge megabanks resulting from merger mania are raising inefficiency and customer alienation to undreamed-of heights.
This isn’t the work of charlatans intent on robbing you blind; it’s simply the classic symptom of unwieldy bureaucracies grown to a size that defies the best of management intentions. Now, with new laws blurring the line between banks and other financial institutions such as insurance companies and stock brokerages, financial behemoths can only grow even bigger.
Fortunately, solving this frustrating problem is relatively painless. Just search out the smallest FDIC-member bank in your area and give it a try. They will be delighted to welcome you and your business. They need you and they will appreciate you.
You’ll receive more personal attention from a small neighborhood bank than you will ever get from a financial goliath, and with exactly the same insurance protection you receive from the largest banks.
Even at a small bank, you should follow the principles outlined here. But you’ll be doing it in a friendlier atmosphere. Fewer banking frustrations will leave you better prepared to enjoy your stroll down the path to a secure financial future.
Taken individually, these cash management techniques may seem obvious or even inconsequential. However, when you blend them together in a consistent manner, they will form a significant and permanent contributor to your net income and your economic well-being.
Bill Lynott is a management consultant, author, and lecturer who writes on business and financial topics for a number of publications. His book, Money: How to Make the Most of What You’ve Got, is available through any bookstore. You can reach him at email@example.com or through his website: www.blynott.com.