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Time to Upgrade Your Cash Flow Strategy

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Core Group

If you’re old enough to have grandparents who lived through the Great Depression, you might have memories of them holding onto seemingly idiosyncratic behaviors that were caused by enduring that traumatic period. I had a friend whose grandparents refused to allow condensed milk in their house for any reason. They experienced such severe poverty when they were children that condensed milk thinned with water was the closest thing they could afford to fresh milk. The scars from that childhood memory were so significant that even 50 or 60 years later, it still shaped how they lived their life.

What is COVID-19 going to do to us? We don’t mean to suggest that we’ll all be traumatized by the experience, but the seismic shift in how every one of us do business is going to have long-lasting effects that may extend well past our lifetimes.

The changes don’t necessarily need to be negative, however. This is a perfect time to begin looking forward and making plans for how we can better crisis-proof our operations in case something like this ever happens again. Even if we never see another event like the Coronavirus pandemic, being able to strengthen our operations is never a bad idea.
To that end, we wanted to use this blog post to speak about the importance of managing cash flows. It’s a subject that could fill a whole bookshelf, but touching on a few simple points might be a useful way to start a conversation about how to reinforce your operation for the future.

Cash reserves

When the pandemic hit and the closures started, you were no doubt painfully aware of the amount of cash reserves you had on hand. We’re not about to recommend that you start hoarding money and burying it in your backyard, but this might be a wake-up call for rethinking your cash reserve policy. Profit First has cash reserves built-in!  Start with opening a separate Profit Account and put 1% of your daily deposits in it.  You’ll be shocked how quickly it builds up.  But don’t touch it! Once you’ve determined what you want to have on hand, make sure that those valuable resources aren’t just sitting in a bank account twiddling their thumbs. Most banks should offer some sort of interest-bearing account, allowing you to ensure that your money is never sitting idle.

Maximize your cash inflows

Keeping a strong, positive cash flow is about more than just increasing sales. It’s about building a stream of incoming revenue that’s even and consistent. Try finding ways to smooth out that revenue stream to create a reliable, predictable flow of funds. Avoiding the roller-coaster lifestyle of boom-or-bust cash flows can make it easier to handle unforeseen situations.

Here are a few ideas to consider:

  • Have you considered offering a subscription model for your business? Your customers could pay a monthly fee which covers the full cost or offers a drastic discount on your services. Subscription-based plans are now becoming popular with hairstylists, tradespeople, and even some legal practices.
  • Try to take deposits and periodic payments on larger projects. Instead of getting a huge hit of cash all at once when the project is finished, consider taking a deposit on the front-end and establishing milestones that can be paid as you make progress.
  • Layaway programs are coming back into vogue, and it can help expand your customer base while providing extended cash flows.
  • Train your customers with reliable invoicing. Develop consistent schedules for invoicing, calling on late accounts, and escalating overdue balances. Late payments will generally become as late as you're willing to tolerate them, so start being firm, yet fair.

Minimize your cash outflows

It seems like money is always flying out of the checking account, but with a bit of planning, you can slow down the cash outflows that eat up your revenue. Here are just a few ideas:

  • Make sure you’re automating all the payment processes for regularly occurring bills like utilities, loans, and rent. And don’t pay early, just pay on time.
  • Pay bills on a regular schedule.  We use to make sure every bill is properly reviewed and approved, and we pay bills twice a month.
  • Review your credit card charges!  It is shocking how much waste there is in virtually every one.  Canceled or no longer used subscriptions are the biggest culprits.
  • Schedule your maintenance regularly to avoid having to pay large fees for repair or replacement of cost-intensive equipment.
  • Do you barter for any goods or services? If you’re a graphic designer, can you do design work for your landlord in exchange for a discount on the rent? If you’re a restaurant, can you provide meals for your plumber in lieu of writing a check each time you call them? Bartering has a track record that goes back a few millennia, and it’s a classic for a reason, but beware of the tax implications!

These ideas by no means represent an exhaustive list, but they’re something that you can use as a jumping-off point to begin rethinking how you can retool your business to give it a better footing when unforeseen comes knocking.

Being able to control your cash flows isn’t just a coupon-clipping strategy and it’s certainly about more than just saving money. When you’re able to identify ways to control your cash flow and make small-but-meaningful adjustments, you gain a degree of control over your operation that will not only ensure its longevity, but it will also keep you from making drastic, panic-inspired decisions.

If another crisis comes (knock on wood), your first reaction won’t be to institute layoffs, cancel lucrative projects, or start amputating essential parts of your operation to stay alive. You’ll have a deeper toolkit that will provide multiple options to weather any storm.

As the world starts to get back to something resembling normal, please remember that Core Group is going to be here to help you get back into it. Stay safe, and we look forward to talking with you soon.

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