3 Steps to Better Managing Cash Flow


A friend of mine, who is a construction contractor, was able to share an interesting story with me recently.  In his marriage, he and his wife keep completely separate checking accounts.  They are each responsible for part of the household expenses, but money rarely flows between the two checking accounts.  Right or wrong, this is how they've done it for years.

One day, my friend comes home to find his wife had "accidentally" opened up his bank statement showing a large amount of cash in his savings.  She was irate.  She was scraping by and having to use her credit cards when there was more month left than money.

The reason for the large savings balance, though, was that he was a contractor and small business owner.  He had employees.  He had equipment to buy.  He had invoices from the lumber yard that needed paid.  In short, this was his working capital for the business and it wasn't money he could just go spend.

I've been fortunate enough to work in other businesses that are substantial in size and see first hand how they manage their cash flows.  What I've learned:

1.  Working Capital is a must for our business.  Or as I explained it to my contractor friend, Grease Money.  Having some money in the checking account greases the wheels of the business.  When sales are slow for 2 or 3 days in a row and then Royalties and the weekly UPS Invoice get pulled on the same day, it can cause temporary cash flow issues in the business.  I would think at minimum, one weeks worth of sales in the checking account at all times would be needed.  Another large franchisee I worked with maintained, between cash and an open line of credit, 4 weeks worth of sales.

2.  Managing your house accounts.  When I first opened for business, I tried to open as many house accounts as I could, thinking that with open lines of credit at my store, we'd be the first stop instead of the post office or another shipping location.  In many cases, that worked.  In many other cases, the customer took up to 60 days to pay me while I had to pay the shipping invoice from his packages almost immediately.  Good for reported sales, horrible for cash flow.  I've since had to cancel some of those late paying accounts and limit the opening of new accounts to established businesses.

3.  Forecasting sales.  Stores that are three years or past have a decent historical record of their sales.  Our Admin System tools allow us to download those sales and/or slice and dice the information extremely well.  I've started forecasting sales using a spreadsheet that allows me to predict and then compare sales from the same month last year.  You can download it here.  It may need tweaked a little bit depending on your particular profit centers, but it's proven very useful.