Staying On Top of Cash Flow

Elizabeth Millard -- Expert Business Source, 1/30/2007 8:34:00 AM

When Susan Adelle describes her old way of bookkeeping, she can’t help but laugh. Receipts were thrown into a shoebox, and invoicing was done when she had time. The problem wasn't just that everything felt disorganized -- the “system” also caused cash flow issues.

The shoebox system didn’t last for long. Adelle, owner of Design 2 Construction, a 7-person kitchen and bathroom remodeling contractor in San Francisco, figured out what every business owner eventually realizes: that better bookkeeping can help minimize the cash-flow problems that plague any small business.

To spruce up her own bookkeeping, Adelle began using Intuit Inc.’s QuickBooks, first for basic expense tracking and budgeting, then for invoicing. She also changed her mindset.

“I’m adamant about invoicing once a week, and because of that, I get paid once a week,” she says. Her philosophy is simple: “When you’ve got money coming in, you've got a better cash flow.”

The steadier stream of payments that results from the weekly invoicing means that Adelle doesn’t have to borrow funds from one project to pay unanticipated expenses for another. That’s a common challenge for smaller businesses, and one that can quickly get out of hand without a few basic accounting systems in place.

Small business owners often are so focused on day-to-day issues that they tend not to step back to do basic long-range financial planning, says Nate Sachs, principal at Blueprints for Tomorrow, a financial planning firm for construction and real estate based in Scottsdale, Ariz. Before they know it, they’re looking at negative cash flow.

“With the average business owner, his PDA is his brain,” says Sachs. “They just don't write down everything that goes on. But if a system is developed where they focus on cash flow at the same time every week, and make that time sacred, it'll make the business stronger. You have to set some time aside to work on your business.”

Sachs suggests scheduling a half-hour weekly meeting to discuss only cash flow-oriented topics, which can range from buying a new truck, to changes in materials costs, to hiring a temp, or taking on a new project.

“You’d be surprised how quickly cash flow improves when you do that for a few weeks,” he says.

Adelle and Sachs offer these additional tips to keep the cash flowing:

• Before beginning a project, interview clients several times to develop a clear understanding of their needs. This will minimize unanticipated requests that require a chunk of unbudgeted cash. It’s impossible to anticipate every issue that may arise during a project, but thoroughly scoping out a project up front will benefit both the client and the contractor. “You need to really qualify your clients,” says Adelle. “It doesn't seem like that affects cash flow, but if a job goes wrong, you have to come up with the extra money.”
• Develop incentives for better cash flow strategies used by employees. At Blueprints for Tomorrow, Sachs gives employees 10 percent of any money they save on purchasing, equipment leasing, even office supply ordering.

Business consultant Pam Newman offers these additional tips for improving cash flow:

• Require a down payment on projects.
• Set your terms to be paid in full upon completion.
• Negotiate terms with your vendors for 30 days or more.
• Have a collection process in place, and follow through.
• Set up a line of credit at your bank that you can use in case of emergency.
• Consider factoring your receivables.
• Minimize the amount of draws you take personally from your business.

Elizabeth Millard is a freelance writer based in Minneapolis.

Additional resources:

The Construction Contractor’s Digest: A blog on contracting, with a focus on financial management, from consultant Matt Stevens.

Cash Flow and Equipment Purchases: John Deere Credit’s Situation Analysis guide.

Cash flow software: A list of cash-flow applications for construction.