Cash Flow Do's And Don'ts
Installing great systems but still going broke? These simple steps will improve your cash flow crisis.
It's not that difficult to sell lots of jobs, do great work, earn tons of money, and still go broke in the pro AV business. Here's how. First, sell a big project to a client without doing a credit check or getting a portion of the total cost of the job upfront. Execute every change the client asks for along the way — don't wait on formalities like change orders. Order the major equipment immediately, and let it sit in your warehouse for 60 days waiting to be installed. Submit invoices at your leisure — just because the client processes bills on the 10th and 20th of the month is no reason to hurry to meet those dates. Be sure to submit a nice, vague invoice, too, so the client has to send it back, asking for more detail. Meanwhile, let your vendors wait: They know they'll get paid eventually, right? Don't follow up too aggressively on your account receivables because persistence might offend the client and deter new business. When you finally decide to act, or the client finally turns out to be a deadbeat, make sure you act just after your right to file a lien or make a claim on a performance bond has expired. No matter how much business you're doing, falling into traps like these will take you down the sure road to disaster.
Obviously, it's rare for any one company to make all of these missteps at the same time, but all too many make at least a few. In fact, the hypothetical failings outlined above explain how systems integration firms with lots of business, excellent technical skills, and loads of work in the pipeline can nonetheless exist on the brink of bankruptcy. It all comes down to managing cash flow, a task most integrators will admit is one of the most difficult operational tasks they face. “Profitability and cash flow really have very little to do with each other,” says Reed Philips, chief technology officer of AVCON, Inc., a Cary, NC-based systems integration firm specializing in the corporate and house of worship markets. “You can make a lot of money and go broke if you can't collect.”
Philips posits that young and growing companies are particularly susceptible to cash flow problems. “Cash is king when it comes to growth,” he says. “In fact, your cash flow curve tells you how fast you can grow without going broke. It's absolutely essential to focus on it, even more than on profitability.”
Yet many managers don't. Jeff Quint, executive vice president of the National Systems Contractors Association, Cedar Rapids, IA, says this problem often results from the basic reasons people go into business in the first place. “Many of our members got into this business because of a technical love they had,” he says. “The business side is not their love.”
As a result, top executives with sales or engineering passions are out in the field, selling lots of work and doing great jobs. But there's often nobody in the shop who really loves making the numbers work, Quint notes.
Paying attention to financials means using credit wisely, billing correctly and on time, working with vendors to get the best payment terms, and negotiating a whole range of details that can trim days from the time it takes to turn receivables into cash. The impacts of these tactics aren't trivial, says Brad Nelson, owner of Sound Solutions Northwest, an AV integration firm with 10 employees located in Kennewick, WA. “In an industry where we're sometimes struggling to make three, four, or five percent, every little bit you can save makes a difference.”
The most under-appreciated secret, some experts say, is that good cash flow management doesn't just put more money in your pocket more quickly. It also gives you a clear, day-to-day picture of exactly how well the company is functioning — in technical and operational terms as well as financial.
“The first thing that happens if there's an issue with a project is that payment stops,” says Todd Lucy, president of South Western Communications in Evansville, IN. “Cash flow reflects both technical performance and finances. The more you can stay on top of your receivables, the more successful you will be.”
Nelson says you can't expect your employees to know what cash flow is and why it's important unless you show them. “All employees can impact cash flow positively or negatively,” he says.
Quint concurs, describing a cash flow triangle in which sales, operations, and accounting play equally important roles. “Each player has to realize they're one-third of the process,” he says. “Don't just do your work and forget you're part of a process.”
Although a sound cash flow strategy starts with such obvious steps as billing on time, it can also encompass a wide range of creative tactics. Some veteran systems integrators make these suggestions to improve the cash picture for any company. Take a look at the following 10 tips to keep the cash flowing:
When a vendor offers a cash discount for fast payment, take it. Seize these discounts, even if you have to borrow the money to do it. “If someone offers me a discount, I will borrow from the bank to take the discount,” says Jim Hendrix, chief financial officer at Lone Star Communications in Grand Prairie, TX. “That goes straight to the bottom line.”
Philips agrees, noting the arithmetic involved is simple and compelling. If the bank charges the prime rate or a little more, that's four or five percent interest yearly — or quite a bit less than one percent for a month's use of the bank's cash. That cash, in turn, can often help the integrator save two percent of the total on a vendor's invoice — all at once.
Consider leasing. Bruce Petersen, vice president/finance at Electronic Contracting Co., Lincoln, NE, suggests that by allying with a leasing company, the integrator can offer customers access to larger, more expensive systems and get their cash from those sales up-front. “People don't think twice about leasing a car, yet you could spend the same amount of money on a nice phone system, and it doesn't occur to them to lease it,” Petersen says.
He urges integrators to consider affiliating with a leasing company. “There are dozens out there,” he says. “Now the customer can consider a system they wouldn't have the cash to pay for, and you can get paid right away.”
Look for steady, recurring revenues. The classic vehicle for smoothing out cash flow is a maintenance and service contract, notes Quint. “If you can move your recurring revenues from 10 percent of your total to 20 percent, you can manage your whole business more smoothly,” he says.
Re-think the 50/50 billing schedule. Getting half of a job's total cost upfront is great, but leaving the other half for billing on completion isn't necessarily the only option, suggests Philips. He says AVCON has often been able to negotiate a 45/45/10 arrangement — with 45 percent up-front, 45 percent paid upon delivery of the major equipment for the job, and 10 percent after completion. This retainer amounts to the company's profit on the job, he adds, and the earlier bills allow it to cover all of its costs punctually. “We've never had a single client push back on this,” Philips says. “It's a relatively small change, but it has a dramatic impact.”
Learn your client's systems. “Know the draw dates, and when bills can be paid,” Nelson urges. Philips adds that missing a client's invoice processing schedule by a single day can add 20 or 30 days to wait for a check.
Sometimes the client should pay direct. Lisa Layne, chief financial officer of Pro Sound Inc., a systems integrator located in Miami, suggests there may be cases in which the client can directly purchase equipment for a job and assume responsibility for paying the vendor.
Schedule deliveries to meet needs. Get equipment vendors to deliver products as close as possible to the time they'll be needed. “You don't want the equipment to have to be stored for long periods of time, but you still have to allow enough lead time to receive and not have to do so on a rush basis,” Layne says.
It's also vital to order the right stuff. Be sure the proper equipment is indicated for the job so you don't order and receive items you subsequently find out you can't use, she says. “Depending on the vendor, you may not be able to return the equipment, or you may need to pay a restocking fee,” Layne says.
Consider credit cards. If your company has any significant volume of one-off sales, small systems, or individual pieces of equipment, opening a merchant account with Visa or MasterCard could be a smart move, Petersen says. You get your cash from these sales immediately. But be careful: These one-off sales tend to be low-margin items like computers and plasma screens, and the credit card company's fee of two to four percent could easily eat up your profit.
Make good finances look good. Hendrix warns that even strong financial performance can give bankers second thoughts if it's presented in a disorganized, slipshod manner. “If you make it hard on the bank, they'll make it hard on you,” he says. “Your numbers could be perfect, but tainted by poor presentation.”
Pay your sales staff differently. “Don't pay your people based on revenue sold, pay them based on amounts collected,” Philips says.
Big Cash Flow Bottleneck
Mistakes in cash flow management — errors of omission and commission alike — can take a big bite out of any company's long-term success. Here are five faulty strategies industry experts suggest you should avoid.
- Dawdling over your invoices. “You have to get your invoices out the first day you possibly can,” Hendrix says. “If you delay one day, the client has really gotten two extra days to pay you.”
- Running your business without credit. The idea of never borrowing a cent is appealing to many, but running a business entirely on cash can starve its growth, warns Philips. Growth means shelling out money to open new offices and hire and train new people — a company unwilling to borrow often just can't do these things. Using credit wisely can keep your cash handy when you need it.
- Overlooking your lien rights. If the worst happens, you may have the option of filing a lien or a claim against a performance bond...if you do it in a timely manner. But these rights time out, often in as little as 90 days after a job is completed. So watch those aging receivables, and keep your rights in mind.
Similarly, some larger players in the construction industry, like general contractors, will ask subcontractors to sign lien waivers in exchange for each progress payment on a job. “Never sign a lien waiver unless you have actually gotten paid,” Petersen says.
- Handling change orders casually. Integrators often proceed with changes requested by a client without waiting for a formal, approved change order. That may suit the installation schedule, but it can lead to problems when invoicing time rolls around, Quint explains. “We should do the work after we have the approval, not before,” he says.
- Borrowing the wrong way. “It's a mistake to use your credit line for capital purchases,” Philips says. “The bank sees it differently. They will be quite willing to write a second loan.” Credit lines, he adds, usually have to be renewed annually, while term loans can offer longer periods. “If you're not out of it in less than a year, it should be a term loan,” Lucy says.
He acknowledges there's a trade-off involved in this tactic, though. “Don't turn your salespeople into collections agents, but also don't have them out there selling jobs you won't be able to collect on,” he says.
A key part of this mandate, Philips says, is for salespeople to spend a little extra time getting to know the client's internal processes: When do they like to get invoices? How much detail do they want in the invoice? Who has to approve bills above what dollar amount?
Clients are not trying to keep you from being paid, Philips maintains. “But their process is their process,” he says. “If you try to change their process, it isn't going to work.”
In addition to these 10 tips, all of the experienced integrators interviewed for this article agree — the most important advice they can give is to pay close attention to cash at all times. “Cash flow problems can start if you take your eye off the ball for even a couple of weeks,” Nelson says.
And Hendrix warns, “As soon as you get behind, the tail starts wagging the dog. The cash starts managing your business instead of you managing the cash.”
John McKeon is an independent consultant and writer based in the Washington D.C. area. He can be reached at email@example.com.