I’ve never encountered an Owner or chief executive of a services company who deliberately created a negative cash flow situation. And yet too many companies find themselves sales rich—lots of top line revenue—and cash poor. How does this happen?
It likely happens due to one or more of these six negative cash flow practices:
- Deferred receivables. You have plenty of sales but there’s a delay in receipts due to the terms and conditions of your sales contracts.
- Payables and receivables are out of sync. You’re paying out before you’re taking in.
- Misunderstanding the cash situation due to your accrual accounting system. Revenue is booked into the system when a sale takes place even if the receipts are delayed. Your P&L might show robust sales, while your cash balance is dwindling due to your expenses and AP obligations. Therefore, you must have a cash flow statement as well as a P&L.
- Failure to require a profit with every sale. Even if the timing of your AR and AP are coordinated, you can be short of cash if your sales don’t generate any or enough profit.
- Your billing processes. If invoices are sent only once month, by definition you will have negative cash flow since your outflows occur weekly.
- Hourly billing. If you invoice after the fact, as is required by hourly billing, your cash flow in will always be behind your cash flow out.
There are alternatives for each of these causes of negative cash flow. Trivers Consulting Group has been helping services companies ensure positive cash flow since 1999.
For example, when a CPA firm client switched to packages of services instead of offering a menu of a la carte services and charging in arrears by the hour, it permanently eliminated negative cash flow in two months time.
Here’s quick overview of the three distinct cash flow positions:
Negative cash flow means you’re paying out more than you’re receiving at any given time. This timing issue could be caused by the terms and conditions of your sales, lack of profit in every sale, and/or excess expenses. Negative cash flow is dangerous to the health and well-being of your company and must be fixed immediately.
Positive cash flow means your receivables and payables are timed to provide a cash cushion each month. You should accumulate this excess cash in a reserve to cover six months of expenses in event of an emergency.
Free Cash Flow is excess cash beyond what you’ve saved in your 6 month reserve. Free cash flow is the most valuable asset on your balance sheet. Your CFO or banker should identify liquid investments that will store the cash and generate a small rate of return.
Schedule your discovery call to see if we can help you turn negative cash flow into positive cash flow.
About Money Matters: Envisioned by Susan Trivers, Money Matters provides everything you need to secure your company’s money. It’s your one stop for the best strategic and tactical advice about cash flow, profits, growth, taxes, and costs. You can choose to focus on one area or a combination. You can also choose to go deep with customized services from Trivers Consulting Group. Request a complimentary discovery call to get started making more money. 703-801-0345.