My youngest son, Austin, likes to play the “net cash game” method of settling debts. I owe him $10, but then I pull out a twenty, he then takes out five ones from his wallet and states I now owe him $15. Then we exchange back and forth until the accountant in me realizes that I paid him $25 for a $10 debt. At 16 he bought an Audi…no surprise.
Business cash flow with customers and vendors can seem like the same game. Taking from here to pay there, paying partial or late payments to vendors to “make payroll.” Dan Ginsberg writes about this in Ten Steps to End the Dash for Cash. His point is well taken. Too many small and medium-sized businesses do not look at the underlying reasons for working capital shortages.
Here are some areas you should consider in addition to looking deeper into his suggestions:
- Take a close look at the profitability of your services or products: Too many companies are afraid to discontinue losing products or services thinking that they will come around. There is no room for favorites in business. You must take a hard look, but before that, you must determine that your costing information is accurate. This requirement is a cost accounting function. If you do not have good information to make your decision, then your decision may not be a good one.
- Take a close look at the profitability of your customers. Have you ever read The 80/20 Principle by Richard Koch? The book argues that clients that represent twenty percent of your revenue are absorbing eighty percent of your company’s time? Can you think of customers like that? If you do, you should consider whether they are worth keeping. Remember, that extra time can be used to bring in better clients or service clients that are more profitable.
- Generate a list of monthly metrics that represent the health of your cash flow: Most business only look at monthly sales. There are several other cash flow metrics that you can monitor in order to gauge the health of your business. List them and use them.
Cash flow is the blood of a business. Take its pulse and regulate it to a healthy future.