6 Tips for Managing Cash Flow in Your Alarm Business
Poor “cash flow” is a big reason why more than half of small businesses don’t survive. This is particularly true in the alarm business, where the monthly recurring revenue model can complicate matters. The importance that cash flow plays in maintaining a sound and efficient alarm business can’t be overstated.
Cash flow – in a broad sense – is merely the difference between cash coming into a business and cash going out. It is usually measured over set periods of time such as monthly, quarterly or annually. The following are six methods to help you manage your cash stream BEFORE it becomes a problem.
1. Organize Your Books
Lots of business owners put their bookkeeping to one side while they deal with the day-to-day “urgent” issues that seem never-ending. That’s understandable, but if the books aren’t organized, it only gets more difficult the longer you put it off. Start by taking a look at your invoicing system and methods of collecting payment from customers. Often, problem areas such as inconsistent invoice numbering, or having no proper record of which customers have paid, can turn small problems into major obstacles. Simply getting a good system in place can help you find sums of money that are owed but overlooked.
For most businesses, the only real way to get the books in order is to use an accounting system and to make a point of keeping it up to date. Once your books are in good order, you’ll be able to stay on top of how much each customer owes you. You and/or your bookkeeper will also be able to generate useful reports like aged debtor and creditor reports so that you can understand your cash flow much more easily.
2. Sync Up Your Credit Terms
If the credit terms you have set with your customers are out of sync with the credit terms set by your suppliers, negative cash flow can build up which quickly gets worse over time. For example, if your customers have 30 days to pay you but your suppliers want to be paid within 15, you are now acting like a bank and “floating” the differential. This will create immediate cash flow problems.
If you find yourself in this situation, first try to renegotiate terms with your suppliers, then look to your customers. However, if this is not possible right away, maybe because you have written agreements in place, then you might try to offer early settlement discounts on your invoices, which will give your customers a financial incentive to pay you early. This is typically around a 2-3% reduction in the total invoice value.
3. Don’t pay everything at once.
For a small business, cash flow management is like being a traffic cop. You can’t let all the cars go ahead at the same time. Many business owners, in an effort to be efficient, line up their monthly bills, sit down and write all the checks at once—with the hopes that they’ve put aside enough cash–or that their upcoming sales will float their payments through. Instead, think of it being a 4 way stop sign, and stagger the payment dates accordingly. Consider setting up three buckets for disbursement of checks:
- •Bucket 1: Must Pay Group – These are the checks that can hurt you the most in your ability to operate your business if they aren’t paid. This includes items like payroll, taxes, rent or late utility bills.
- •Bucket 2: Important to Pay – Items like utilities and insurance payments will often have a reasonable grace period or a financial penalty modest enough to take advantage of having this cash on hand when needed. But these are still important bills to pay because you don’t want to get cut off in the middle of your business cycle.
- •Bucket 3: Flexible Pay – Suppliers and vendors can often be the best sources of flexible financing. Many of these are happy to work with a stressed business as long as there are regular payments scheduled, even if they are small. These suppliers will often continue to deliver as long as you keep open channels of communication and make payments with regularity.
4. Address Profit Problems
A lack of profit will eventually lead to a lack of cash. If your business is losing cash, it’s essential that you uncover the cause of any losses and address them as soon as possible. Perhaps you do not have enough margin built in to your pricing structure to cover your expenses. Perhaps you hired too many people too quickly. Possible solutions to becoming profitable may be to increase your prices, increase sales or gain better control over your expenditures.
5. Forecast Your Cash Flow
Look at your sales pipeline along with your current customer monthly revenue to determine a monthly cash flow forecast. With a cash flow forecast, you’ll be able to see which months you can expect to see a cash deficit, and which months you can expect a surplus. You’ll also be able to get a pretty good idea of how much cash your business is going to require over the next year or so to survive.
You can gain a lot of insight into your business by comparing actual figures to what you forecasted every month. If you see discrepancies between the two numbers, you can dig further to see what might be happening. For example, you may discover that you are spending twice the amount you thought you were on your telephone bill; you can then look into the possibility of switching providers for a more competitive rate.
Continually adjust your forecasts so they are more accurate going forward.
6. Growing too quickly
Most people want to grow their business, but sometimes growing too quickly can cause cash flow issues that can hurt the business. For example, a small contracting business landed a big client who wanted a large project completed within 12 months. In order to fulfill this request, the contractor needed 4 additional staff members to deliver the project on time. He immediately took on the extra staff members he needed, but when it came to pay day, he could not cover their wages as he had not received his first payment from the new client yet.
To fix this kind of problem, you could access a line of credit from the bank, such as an overdraft or short-term loan. In some cases, this is a viable option because banks are more willing to lend to a business if they can see a draft service contract or letter of intent (but check first!). Once the client pays you, you can pay down your debt, which means that you only have to pay interest to the bank for the amount of time you actually need the cash.