I’m sure you remember me talking about one of my B2C clients.  (You don’t?  Shame on you!)  In that piece, I discussed why we need to focus on how each of our actions mesh with our vision, mission statement, and operational plan.

Part of that reason is that business needs to make a profit.  But, more importantly, it needs to operate with a positive cash flow.  While these two terms- profits and cash flow- are related, they are not identical.

Profits are the amounts of money generated from a business- and this is generally discerned using a financial statement.  (Not really, but humor me for now.)  Cash flow is the amount of money that ebbs and flows into your operation.

If you don’t operate a cash business (even credit cards have a delay in putting the money from a given sale into your bank account), then a sale of a service or a product doesn’t generate cash flow until you are paid.  When you hire an employee, you don’t pay them at the end of each day (you would be in a very small minority- almost of one- if you were to do so), but at the end of a one week, two week, fifteen day, or monthly period.  So, your obligation doesn’t reduce your bank account right now.  When you buy raw materials or goods for resale, unless you pay cash, you are promising to pay someone (the vendor, the credit card company) someday in the future for these items. So, you can see that you can control your cash flow in ways you may not have imagined.

That’s why what this client did was wrong.  He elected to get a big sale from someone who was promising to pay in the future (and for which he didn’t get the promise to be paid with a check, a fact that meant he waited longer and got less cash when payment was proffered by credit card- an Amex, to boot) during his busiest season of the year.  When every bit of cash he had or could obtain was needed to be husbanded to buy the raw materials necessary to satisfy his customer base.

Cash management is job one for every entrepreneur, for every business leader.   It’s the absolutely most difficult thing to manage for most firms- yet, it’s especially critical to startup health.  All firms must ensure they have sufficient cash on hand for the demands of the day.  Whether that means arranging for terms on the delivery of goods, the collection of payment from a sale, choosing a different credit card management firm so the fees are lower or the collections are sooner- it’s whatever it takes.

For example, one of our firms was paying close to seven figures for malpractice insurance.  And, that was a big chunk of our gross revenue.   Now, we could have obtained insurance for about 15% less on the open market.  But, that would require us to pay our premium in one fell swoop. It doesn’t take a mathematical genius to recognize that using that single payment option meant we would need to spend more than 25% of our total receipts that month just to secure insurance.  How would we pay our employees?   How could we get raw materials to make the products we’d need that month and the next?

It was clear that this concept would  NOT be saving us money.  Moreover, the alternative insurance plan covered us for acts committed- and for actions that could be taken against us for things that happened before.  Most malpractice insurances only cover you for acts while you are covered by that firm- and for the time period you have insurance in force.   We opted for the better coverage, 15% more- but they also proffered payment better terms.

So, what actions should business leaders and entrepreneurs take to ensure positive cash flow?

The first thing?  Make sure your products are priced properly.  Whether you use a sophisticated computation to determine breakeven and price above that level or a rule of thumb (that must be verified often) to price your wares at 3 times your cost (like restaurants do for the bottles of wine they sell), the only rule is to be sure you are making a profit on each and every sale.

The second thing?  Make sure you and your customers/clients understand when and how you are to be paid.  The moment you offer your clients terms (i.e., they don’t pay you on the spot for your “stuff”), you have become a bank- one that is loaning your customers/clients money for a certain period of time. Maybe a prompt payment discount will get those funds to your bank quicker?

The same approach applies to your suppliers and to your vendors.  Our B2C client arranged for 150 days terms from one big supplier.  (Actually, that is not quite true.  It was 150 days from the day the product was shipped- by boat- and transport, customs, and local delivery meant the product really didn’t reach our warehouse for 44 more days.  But, 106 days was pretty good terms, no?  It meant we could warehouse their product for 45 to 60 days and still sell the stuff and receive payment before we had to pay the vendor.)

Finally, make sure you have the broadest customer base possible.  Because if it is just one customer, then your future is totally entwined with theirs.  If this customer has to wait for payment- you will wait longer.  If their contract is not renewed, you are dead in the water/

Remember, the maxim is a maxim because it’s true.

CASH IS KING!

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