If you’re like most independent contractors, April is a tough month for cash flow. You are ramping up services and have a full payroll, but receivables have not started arriving. In some companies this creates a cash-flow crisis that can continue all year.
There are ways to deal with cash-flow issues, and the first rule is to remember cash flow in your company is as important as net profit. Cash shortage issues can devastate a profitable company, and a company with cash available is always successful.
Improve cash flow
Review your collection period. Many contractors have offered delayed payment terms to clients because the client asked for longer terms. This is a classic case of letting the client state your terms and conditions after the price has been set.
According to the most recent cost study by the National Association of Landscape Professionals, the average collection period for a well-managed contractor is just over 24 days. According to the study, the average collection period should be evaluated against the credit terms offered by the company.
As a rule, the collection period should not exceed one-third longer than the regular payment period. If your company’s typical terms call for payment in 30 days, then the collection period should not exceed 40 days. Make a serious effort to recover your cash as soon as possible and look at the big picture when talking to clients about payment terms. Be sure they understand you can offer the best service and better quality work only when payment terms are met on time.
Cash is king
Bankers always look at the balance sheet before reviewing the P&L statement. The reason is, bankers want to see the amount of cash on hand and the P&L statement does not report cash.
Your receivables are an asset on your balance sheet and the banker will ask for an aged receivable report showing how old your receivables are. Long overdue receivables will be disregarded and will reflect poorly on how you run your company.
Talk to your banker about short-term financing, including a line of credit. The key to successfully doing business with banks is to establish your relationship and credit line before you need it. Bankers are never impressed with last-minute requests for funds and rarely approve a loan application filed by a nervous business owner. Establish a solid relationship with your banker, just like you do with your equipment, fuel and chemical suppliers.
The average outstanding receivable amount for a $10 million landscape company is $738,000 or about $75,000 per $1 million in revenue. Compare your outstanding receivables. If yours are higher than these industry averages, make changes right away.
Do credit checks on your clients every year, more often if they’ve missed payment dates recently. Make calls to all past due accounts and never be embarrassed to ask for payment. Pleasant but persistent reminders can improve a slow-paying accounts record and eliminate a potential loss. That said, persistently slow-paying clients are not good clients. Unless you can improve their payment record, stop doing business with them.
Read more: Accounts Receivable Survival Guide
5 Cash-Flow Strategies
- Improve your cash management processes.
- Reduce your collection period.
- Establish a line of credit.
- Watch your aged receivables.
- Consider electronic payments.
Establish new payment terms
Price increases are challenging today’s small business owners. Shorter payment terms can be part of your renewal discussions and addressed at the time of the renewal. I know contractors who have successfully shortened payment terms with little notice to customers. Larger accounts always want longer terms, so be sure to prepare your response in advance of the client’s request for longer terms.
Send invoices out earlier. Don’t delay your billing processes. Snow services companies tell me they’re so busy after a storm that it takes them weeks to catch up on billing.
Make prompt invoicing as important as customer service in your company and accelerate the billing process to improve cash flow.
Electronic payment systems can help bring in cash faster and control payables more efficiently. Develop a direct deposit payment process for your clients. Clients can make payments on the exact due date using electronic transfers, and your funds are available immediately.
When preparing your renewals and proposals, stress how you offer the latest innovative ways of doing business electronically; you’ll be surprise how impressed clients will be.
Likewise, you can pay your bills electronically and hold your funds until the day the bill is due. Ask suppliers for additional discounts for paying electronically. Many successful contractors are using corporate credit cards for expenses today, and the grace period on the cards’ terms helps them improve cash flow. This is a way to buy some time and gain ground with cash flow. It’s an accepted and commonly used business practice.
Cash is king in business today, and by upgrading cash management processes you’ll improve your entire business.