As the end of the year nears, most contractors begin reviewing their year-end results with their accountants and advisors.
As they do this, there are three very important elements that get the eagle eye: gross profit, total income and cash position.
Many businesses have reduced their labor expenses in the past few years. Most of the time they find they can get along nicely with a lower labor burden. Sure, different companies reduce labor in different areas, but most have reduced their overall labor expense. These reductions increase the bottom line. How cash flows through the business should receive more attention in many businesses. Gross margin and total profit are always important, but cash flow is what keeps the business running each day. Cash is king.
For many businesses, it’s easier to calculate gross margins and total income than it is to track cash flow. The aged accounts receivable report in the company’s financial system is the place to review how the company is doing collecting revenue. All too often nothing happens until cash becomes tight and senior managers try to find out why. At that time, a manager begins contacting the past due clients to hopefully bring the accounts current. Often the same accounts are past due each month, and this creates a cash crisis. Improving cash flow takes more than phone calls. It requires a new and more aggressive approach to cash management.
Take-Away Tips To Improve Cash Management
- Manage receivables like you manage your P&L.
- Tell past-due clients why it’s important to always be current.
- Drop nuisance clients before you get burned.
- Know the cost of borrowing because of delinquent accounts.
- Partner with good clients.
- Shorten invoice terms starting in the new year.
Your account is past due
When contacting chronic past due accounts, emphasize to them how important it is for them to be current year-round, and that their pricing is based on prompt payments. Some contractors discontinue service to consistently delinquent clients. It is more expensive doing business with them, and someday you might get burned. A consistently delinquent client is a drain on the company’s profitability. Being ahead of the curve in payment discussions with past-due accounts is always a good business practice. Ignoring or letting clients slide on payment is never smart business.
Don’t let their problem become your problem
Most clients want to be current. If they slip behind, a more stringent invoice payment schedule on your end is in order. The new approach should include shorter invoice terms, which will result in faster receivable payment times. In the service business today, 60 days or longer payment terms are unacceptable. If your clients are demanding extended terms, drill into the why and resolve it before your clients’ cash flow problems become your cash flow problem.
Like everything in today’s economy, the key to improving your cash flow begins with customer relations and service. Clients demanding longer terms may not be happy with your service. They are showing their displeasure by demanding longer terms or letting their accounts go past due. Either way, the result is your poor cash flow. Set a company policy that considers the cost of carrying past due accounts by determining the financing expense incurred. Consider eliminating consistently delinquent accounts. You may find it’s better to let a competitor have those clients.
Last, but not least, review your borrowing costs and analyze the savings you could achieve by tightening up your terms and receivable collections. Borrowing to finance the operation while clients go past due is never a good practice.
Good customer relations, better cash flow
Good customer relations include more than just doing quality work on time. Businesses today are looking for long-term partnerships with service providers. Establishing these partnerships requires watching over their properties like they were your properties and offering suggestions that can enhance the properties and even reduce their maintenance costs. If clients have older landscaping that requires more services, suggesting changes or enhancements that would lower their yearly maintenance expense is good business. Do it before a competitor does it, and you’ll have a client for life. Be sure your client knows you have their best interests in mind and that your service is priced based on prompt payment terms. Invoice terms of net 15 days improve your cash position and reduce your need to commit company funds to finance the operation.
Good cash management is an important part of good, profitable business and should be part of your management strategy.
Rick Cuddihe is president of Lafayette Consulting Co., and works with green industry companies to improve their operations. Rick is a PLANET trailblazer and business advisor. Contact him at firstname.lastname@example.org.