Episode 100: 4 Ways to Avoid Cashflow Problems

Cashflow is so important to your business. As a small business owner, you have to wear many hats. And making sure you’re on top of your books is one of them. These four tips will help you avoid cash flow issues and help your business succeed.

Roger: Welcome to Local SEO Today I’m Roger Murphy.

John: And I’m John Vuong

Roger: Welcome to this segment. We want to talk to business owners and entrepreneurs today with regards to the lifeblood of the business, John, which is cash flow. Cash is king. You just cannot stay in business without the cash flow and margins so let’s talk about maybe some of the pitfalls and maybe how the major ways to make sure that you’ve got things under control.

John: I think we’re gonna talk on four fronts and there’s gonna be four bullets here. The first one we’re gonna talk about is really knowing your numbers and what I mean by that is whatever you’re bringing in, you need to know what’s going out so revenue comes in, sales and what is your profit margin versus your expenses.

Roger: And maybe you can look at it as in terms of, “Here’s the nut that I need to crack every month.” My insurance, whatever subscriptions, cost of goods, etc. No one costs to have the door open without earning a penny. That’s your baseline. Know that number.

John: Exactly, so is it…Do you have a storefront or is it a service based company? So if it’s storefront what’s your rent like, what are the people costing you and what are some of the software and all the equipment that you’re using is at least…What are the you know…

Roger: Insurance, probably tied to his Hydro.

John: Heat, whatnot. What does it cost you to run that business?

Roger: So then you break it down from not a month but even bring it down to the week or you break it down to the day to say, “Okay, for me to open the door today, it cost me a thousand dollars just to have the store open today. It costs 30,000 a month to run this but it’s a thousand a day.” That’s your baseline, know your number. Now you build on that.

John: And how many customers do I need to acquire? What does my revenue look like? How much do I price my product and service so that I can achieve whatever margin that you want because you also have to remember whatever margins of revenue you generate there’s taxes that have to be incorporated, right? And are you paying yourself as well, right? So these numbers…Knowing your numbers is so critical for running a successful business owner you know, a lot of business owners just love doing what they’re doing but they forget or let someone else take care of the bookkeeping and accounting. You need to be in control of your numbers.

Roger: Exactly, so if you have…If you’re not careful you say, “Oh, geez. No, I had a great week. This weekend you know, I did ten thousand in sales. This is fantastic.” But guess what it actually was cost nine thousand five hundred to have the store or your business open. You need to know that because it will set your mind to, “Okay, here’s my baseline. I’m not bringing enough revenue in and I need to hit this target. So that after taxes, after margin, after staff, after all the expenses there’s something for me.” That’s the reason why you’re an entrepreneur, you’re business in the first place.

John: Because hopefully what you’re trying to do is achieve better monetary rewards than if you were to work for someone else.

Roger: And I know this is very difficult. It can happen but I remember I met a client years ago he was in I think the upholstery business but he said from the day one he opened his business he was profitable from the get-go. He knew his numbers, he kept…His overheads were low enough. His first customer came in. He was literally in the black from the day one and that’s very few people I’ve ever met over the years. Most have a debt that they you know, a hundred thousand dollar credit line or John, you know, they’ve taken on leases or whatever…

John: Borrowed money.

Roger: You know, it can be done. But know your numbers.

John: Know your numbers so the second thing that we want to talk about is know what your billing policies are because unless you’re a product where someone’s gonna buy a physical widget. They pay right then and there. And you know exactly what your margins are, the cost of goods you know, if you’re a service based company what is your billing policy? Do you collect right off the bat? Or do you collect within 30 days if you’re a large consumer goods company, etc., right? So know what your policies are.

Roger: Exactly. Obviously, what you want as a business owner is to get the money right away for the work that’s been done. For example emergency style businesses. Emergency, whether it’s a plate-glass repair or locksmiths where there’s been a break-in, etc.Those are emergencies they come out after hours, they charge a superior you know, a fee, a large fee for this but you pay them on the spot. They don’t bill for 30 days down the road. They take it on the spot.

John: Yeah and figure out like how do you collect that money upfront and know someone that can actually pay you because you don’t want to do work for free, right?

Roger: “Send me a bill.” How about that one? “Send me an invoice.” Well, I mean that is sort of a promise to pay you in the future. 30 days goes by, 60 days. You’re phoning and can you get me a check? I want to drive by and pick up the check. It’s something you really do not want to. I mean there’s a reality in life that you may have to do that sometimes but get the money as soon as possible. Make it easy for them to pay.

John: And maybe that means you get your credit card transaction machine, right? So we use Moneris but we collect Visa, MasterCard and American Express upfront so that people pay right off the bat, right? Make it easy for customers to pay you so that you get paid. Even though there’s a couple percentage that you have to pay as a transaction fee but it’s a peace of mind that at least you got the money in the bank.

Roger: Cash flow, because if it’s sitting out there as accounts receivables or our receivables I should say. It’s a risk out there. The time keeps ticking. All of a sudden it’s going on you know, you’re 30, 60, 90 days, 120 days waiting for your money but this Moneris where it is…It’s true you’re giving them a piece of the action you know, a couple percentage points but that majority of the money is in your bank account and that is a tremendous…That’s what will make your business succeed by having the cash flow.

John: That peace of mind as a business owner, right? You know exactly how much you got in your bank and how do you project paying people from that money. The third thing that we want to touch upon is you know, hopefully as a business owner you don’t have to go through this route but collections, right? Because ultimately if you’re running a company you will probably have to embrace this, right? What is your process like to collect money when people are not paying, right? There’s gonna be outstanding, accounts receivables you know, it’s not…It’s preferred people who owe you but if they’re not paying you that’s a challenge, right? Because you know, things happen like emergencies happen, people sell their businesses. There’s a lot of things that can happen that probably will happen throughout the years that you’re in business so how do you manage your cash flow when there’s people that owe you money.

Roger: Exactly and again it’s a reality in business, the larger the companies they you know, it looks good to you to say I’ve got this large business that once we provide all this work for them it could be worth a hundred thousand, two hundred thousand a year in business to me but you’ve got to be so careful because they’ll take your work and they’ll…You can do all this work for them but what if you can’t get paid that is that a tremendous risk there so enter into any business arrangement very carefully because you do not want to get stuck in collections and have to go to small claims court, John, or try and put a lien against something. It’s just you know, be smart ahead of time, set a system where you’ve got recurring upfront payment, give them a reason why but then you protect your cash flow.

John: And I think a lot of business owners are jumping to bigger projects and getting paid a huge amount you know, and it’s great on the books and it may be great even for your business to be working with a large company but understand their policies and terms of payment. Because ultimately why are you in business, right? To get paid so that you can pay your staff and you know, provide a service that people want, right? But the larger companies have typically, a longer payment periods, right? You know, even working with big merchandising like going into a Walmart or working with big huge retailers and big companies. They take longer to pay you.

Roger: Yes, they do.

John: They have leverage.

Roger: They make it like they’re doing you a favor by buying your product and not paying you but they’re buying your products.

John: So remember you’re a small business owner and cash flow is so critical so remember who your ideal customers are. And Great, if you win these bigger contracts and bigger customers it’s like the bonus but don’t rely strictly on them because they’re not the ones that pay their bills on a regular basis.

Roger: And whether it’s an arrangement, where you could get a retainer, whether you get some sort of upfront money but there are lots, there’s a million stories out there. This is one, John, that I came across. It could have been yesterday but it was 20 years ago. A client of mine. It was a roofing contractor, was doing business for one of the builders in the Toronto GTA Area, roofing. Well over 200,000, owing to builder. “I’m going bankrupt tomorrow.” But they said, “But we’re having a meeting on Monday. We’re restarting as a new company.” So you got this, my client a roofer was going with being invited to price and to provide new work for the new company but in fact they were being stood up for two hundred, for a quarter million dollars on the old company that just went bankrupt so cash flow can kill you and these relationships with big companies be very, very careful going to them.

John: Yeah and I think knowing your numbers I mean at the end of the day, it’s like you need to know where your real customers are, how they’re gonna pay. So the last point I want to talk upon is really building a cushion or a cash cushion for your business and I know it’s challenging when you’re starting off but as you grow and you start expanding and you start growing your business make sure that you have a kiddy or a separate bank account that allows you to you know, if you start not collecting or your business is slow for a certain amount of month, you have a cushion, right? A fund that allows you to stay in operation, right? And this could be three months, six months or even a year depending on what your industry entails, right? Like depending on what your trends are like and what kind of business you’re running, right? But a lot of people don’t even have a cushion they’re living paycheck to paycheck, month to month, day to day, right? And they might be leveraged…Over leveraging their…Borrowing money and you know, borrowing from not just the bank but friends and family and there’s so much going on, right? But knowing your numbers are so critical.

Roger: And protect that cushion. You would hear it all the time. It’s in the news that the average North American is how many paychecks away from financial ruin. People are living so close so as a business owner make sure you know your numbers, make sure you’ve got your margin in there and you it’s not…There’s many, many ways to look at it. They talk about a product, it’s not what you sell your product for it’s what you sell it for. Or sorry it’s not what you sell it for it’s what you pay for it so look for those margins. You’ve got to have a margin in there if you’re just treating dollars, John, like, “Oh, I bought it for this I sell for twice that.” That is not going to protect your business for any dry spells and have as you say, have this cushion set off to the side. If it’s a credit line be very, very, very careful with that because that credit line is as I say, “It’s a lifeline but it’s a very, very dangerous way to run your business.”

John: Yeah and I see this all the time as well. I’ve heard it and we have clients that run into this as well and the biggest challenge is educating them on numbers and finances and running a successful business, right? And what does success mean really? To take care of your people, to take care of your staff and take care of yourself, right? And having…It is rewarding but it’s also rewarding when you’re making more than you’re giving out, right? You’re doing all these products, services, sales and you’re in the red. I mean that’s not fun.

Roger: So at the end of the day, it is be very, very…It is one most important aspects of even running a business is know your numbers, know your margins, make sure you’ve got a buffer in there. Be careful who you enter into long term agreements with that are looking for a lot of your time and your energy and your product but they may not be paying so that’s where you just… Yes, it could be fantastic for your business and your top-line revenue but what about your bottom line profit if you can’t collect on that.

John: Yeah, this is a great topic. Well, thanks a lot, Roger.

Roger: Thank you and thanks for joining us today at Local SEO Today. We’ll see you again. Thanks, John.

John: Thank you.