“If we’re making a profit, why don’t we ever have any money in our bank account?”
This is a very common question by business managers. And it is an important question to answer.
The simple answer is: You have a cashflow problem. Finding what is causing that cashflow problem may be a little more complicated. Usually, a cashflow problem is a result of a combination of two different issues: Slow collection of receivables and short payment terms on your payables.
Besides being a very stressful situation, for a business manager or owner, a cashflow problem can have a crippling effect on a business. If you can’t pay your bills on time, you end up being assessed finance charges and late fees. In addition, this can hinder your ability to open accounts with new vendors or to increase your credit limits with your existing vendors. It becomes a vicious cycle, that can end up in disaster. Taking charge of the situation needs to be done sooner, rather than later.
The best place to start is the cash in-flow. Get your bills out to your customers as soon as the job is completed. If there are disputed items, or small items left to complete, don’t allow that to keep you from billing for what has been successfully completed. Encourage payment by credit card. The credit card fees can easily be offset by the value of getting the cash into your bank account quicker.
Don’t neglect the out-flow of the cash, though. Try to negotiate longer payment terms with your vendors before the money gets tight. Make sure you establish a good line of credit with your bank BEFORE you need it. It will be much harder to get when you’re feeling the pinch.
Don’t let poor cash management drag you down the road to financial disaster. Take hold of the reins and you’ll keep your organization headed in the direction it was intended to go.
