Cash Flow Strategies and Profits - Cleaner Times

Cash Flow Strategies and Profits

Financial

Cash Flow Strategies and Profits

By Mark E. Battersby / Published March 2020

Cash flow is the lifeblood of every business. In fact, according to a recent U.S. Bank study, poor cash flow management causes 82 percent of U.S. business failures. Although seemingly counterintuitive, many experts advise putting cash flow management before profits.

While profits are how a pressure cleaning business survives, a failure to manage the operation’s cash flow can mean running into problems that one profitable accounting period might not be able to offset. Another study, this one by Intuit, revealed that 61 percent of small businesses around the world struggle with cash flow, and 32 percent are unable to pay vendors, pay back pending loans, and pay themselves or their employees due to cash flow issues.

Cash Flow Management: 101

In essence, cash flow is nothing more than the movement of money in and out of the pressure washing business. Cash flows into the business from sales of goods, products, or services. Money flows out of the business for supplies, 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 pressure cleaning 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 pressure washing 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 answer to a number of important questions like the following:

  • 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 its cash and spend it?
  • 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, usually from a cash sale, 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 to pay its own bills and obligations on time or even earlier than required. It may also allow the business to take advantage of trade discounts offered by suppliers.

An important key to improving the pressure cleaning operation’s cash flow can be as simple as delaying all outflows of cash as long as possible. Naturally, the operation must meet 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.

Outflow

Outflows are the movement of money out of the business, usually as the result of paying expenses. A manufacturing business’s biggest outflow most likely involves the purchase of raw materials and other components needed for the manufacturing process. If the business involves reselling goods, such as equipment, the largest outflow will most likely be for the purchase of inventory. Purchasing fixed assets, paying back loans, and paying the operation’s bills are all cash outflows.

A pressure cleaning business can regain control over its finances by adopting best practices and proper tools. A good first step involves how the operation pays its bills.

Many credit cards have a cashback bonus program. Even if the program offers only one percent cash back, that could equate to a sizeable monthly amount for many pressure washing businesses. Of course, because credit cards tend to have a higher 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 business can adopt incentive strategies to be paid faster. An equipment dealer enjoying a 10 percent gross margin that offers a two percent rebate in exchange for early payments might not be appropriate. Giving away small extra services, 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: a down payment required to book a service date).

Some customers are 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 pressure cleaning business gets paid not only affects its profitability but also its cash flow. Today, paper checks remain as the standard method of payment. However, paper checks are slow, highly susceptible to fraud, and bear “hidden costs” such as additional work and back office processing.

Something as simple as asking customers to switch to debit cards or electronic funds transfer (EFT or 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 make up cash flow, such as inventory, 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 pressure cleaning 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 which can be withdrawn from when needed.

Yet another option might be frugality. Aiming to keep the business 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 pressure washing operation to retain cash flow and avoid unnecessary expenses.

Cash Flow Gaps

Remember, however, the cash flow gap in most businesses represents only an outflow of cash that might not be covered by a cash flow 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, purchase extra inventory to meet seasonal needs or to take advantage of a quantity or early-payment discount, or it might spend extra cash to expand its business.

Cash flow gaps are often filled by external financing sources: revolving lines of credit, bank loans, and trade credit are just a few external financing options available to most businesses.

Cash Flow Loans

Cash flow-based loans rely on the value of the pressure cleaning 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 role 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 a 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 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 a negative cash flow can be profound, with so many operating on margins so thin that frequent lost opportunities will put them on the path to closing their doors.

Every pressure cleaning business can improve its cash flow. Of course, in order for this to happen, owners need to adopt best practices in the way they invoice, 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.