Cash flow is the lifeblood of every business. In fact, according to a recent U.S. Bank study, cash-flow management causes 82% of U.S. business failures. Although seemingly counterintuitive, many experts putting cash flow management profits.
While profits are how a tree landscape-maintenance business a failure to manage the operation’s flow can mean running into problems one profitable accounting period not be able to offset. Another study, one by Intuit, revealed that 61% of businesses around the world struggle with cash flow, and 32% are unable to pay vendors, pay back pending loans, pay the owners or the employees cash-flow issues.
Cash-flow management 101
In essence, cash flow is nothing more than the movement of money in and out of the tree care business. Cash flows into the business from sales of goods, products, or services. Money flows out of the business for supplies, raw materials, overhead, and salaries in the normal course of business.
An adequate cash flow means a steady flow of money into the business in time to be used to pay those bills. How well the tree care operation’s cash flow is managed can have a significant impact on the bottom-line profits of the business.
More often than not, the operation’s cash inflows will lag behind its cash outflows, often leaving the business short of money. This shortage, or cash flow “gap,” represents an excessive outflow of cash that may not be covered by a cash inflow for weeks, months, or even years.
Properly managing the operation’s cash flow allows that cash-flow gap to be narrowed or closed completely before it reaches the crisis stage. This is usually accomplished by examining the different items that affect the operation’s cash flow – and looking at the various components that directly impact cash flow. This analysis can provide the answers to a number of important questions such as:
• How much cash does the business have?
• How much cash does the business need in order to operate, and when is it needed?
• Where does the business get and spend its cash?
• How do the operation’s income and expenses affect the amount of cash needed to operate the business?
The “in” of cash flow
In a perfect world, there would be a cash inflow every time there is an outflow of cash. Unfortunately, this occurs very rarely in an imperfect business world. Thus, the need to manage the cash inflows and outflows of the business.
Obviously, accelerating cash inflows improves overall cash flow. After all, the quicker cash can be collected, the faster the business can spend it. Put another way, accelerating cash flow allows a business pay its own bills and obligations on or even earlier than required. It may allow the business to take advantage trade discounts offered by suppliers.
An important key to improving the tree operation’s cash flow is often as simple delaying all outflows of cash as long as possible. Naturally, the operation must its outflow obligations on time, but delaying cash outflows makes it possible to maximize the benefits of each dollar in the operation’s own cash flow.
Outflows are the movement of money out of the business, usually as the result of paying expenses. Unlike a manufacturing business, where the biggest outflow most likely involves the purchase of raw materials, if the business involves selling its services, the largest outflow will most likely be for salaries. Purchasing fixed assets, paying back loans, and paying the operation’s bills are all cash outflows.
Arborists and other tree care professionals can regain control over their operation’s finances by adopting best practices and proper tools. A good first step involves how the operation pays its bills.
Many credit cards have a cash-back bonus program. Even if the program offers only 1% cashback, that could equate to a sizeable monthly amount for many tree care and lawn-maintenance businesses. Of course, because credit cards tend to have a high-interest rate, they should only be used if the balance can be quickly paid off in full.
Improving the invoicing process is another key step in cash-flow management. A tree care business can adopt incentive strategies to be paid faster. A business enjoying a 10% gross margin that offers a 2% rebate in exchange for early payments might not be appropriate. Giving away small extras, on the other hand, might work. Incentives might include the following:
• Small additional services
• Discount for early payments (balance paid before a certain date or yearly invoice vs. monthly)
• Greater flexibility (for instance, down payment required to book a project’s starting date)
Some customers are just late payers and need to be nudged. The way that dunning is handled can, however, greatly affect the collection process. Timing and the quality of message content are the two main factors in the success or failure of these prods.
The manner in which the tree care business gets paid not only affects its profitability but also its cash flow. Today, paper checks remain the standard method of payment for many. However, paper checks are slow, highly susceptible to fraud, and bear “hidden costs” such as additional work and back-office processing. They are also inadequate for recurring invoicing.
Something as simple as asking customers to switch to electronic funds transfer (EFT) or automated clearing house (ACH), providing incentives, etc., are among the tips that can be offered for faster, more secure, reliable, and cheaper payments.
Improving cash flow
Profit doesn’t equate to cash flow because, as mentioned, cash flow and profit are not the same. There are many factors that makeup cash flow, such as salaries, taxes, expenses, accounts payable, and accounts receivable.
The proper management of cash outflows requires tracking and managing the operation’s liabilities. Managing cash outflows also means following one simple but basic rule: Pay your bills on time – but never pay bills before they are due.
Having a cash reserve can help any tree care business survive the gaps in cash flow. Applying for a line of credit from the bank is one way to build that cash reserve. Once qualified, lenders will grant a predetermined credit limit that can be borrowed against when needed.
Yet another option might be frugality. With the aim of keeping the tree care operation lean, evaluate it. Is the purchase of new equipment really necessary? Is hiring new employees really cost-effective? Weighing the pros and cons of all business needs and wants enables the business to retain cash flow and avoid unnecessary expenses.
Remember, however, the cash-flow gap in most businesses represents only an outflow of cash that might not be covered by a cash inflow for weeks, months, or even years. Any business, large or small, can experience a cash flow gap – it doesn’t necessarily mean the business is in financial trouble.
In fact, some cash-flow gaps are created intentionally. That is, a business owner or manager will sometimes purposefully spend more cash to achieve some other financial results. A business might, for example, hire extra workers to meet seasonal needs or take advantage of a quantity or early payment discount, or it might spend extra cash to expand its business.
Cash-flow gaps often are filled by external financing sources; revolving lines of credit, bank loans, and trade credit are just a few external financing options available to most tree care professionals.
Cash-flow-based loans rely on the value of the tree care operation’s cash flow. If the operation has a strong cash-flow stream, it can be used to get significant loan amounts even if there are few business assets. Although cash-flow loans can be expensive, they play a key roll in a business that is expanding.
An advantage of cash-flow loans is the repayment period. These loans are usually designed according to the needs of the borrower, with the repayment period usually between five and seven years. And, since cash flow loans are different from asset-based loans, rarely does collateral have to be put up.
Flowing cash flows
Assessing the amounts, timing, and uncertainty of cash flow is the most basic objective of cash-flow management. Positive cash flow indicates the. liquid assets of the tree care business are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against unanticipated financial challenges. The impact of negative cash flow can be profound, including a business operating on margins so thin that frequent lost opportunities will put it on the path to closing its doors.
Every business can improve its cash flow. Of course, in order for this to happen, it needs to adopt best practices in the way it invoices, follow up with customers, and monitor outflow. Without the help of a qualified professional, these best-cash-flow practices may be more difficult to achieve.