Effective Cash-flow Management

EDITOR's NOTE: David Alan Yoho Jr. is a senior account executive with Dave Yoho Associates, a small business consulting company.


A common problem affecting small- to moderate-sized businesses is cash flow.  If you are expanding or even doing less business, it will be a major factor.


It is common to find that even though successful companies made money in the preceding year, they still don’t have sufficient capital to pay their bills on time, pay adequate compensation to the owner/shareholder or expand their business.


Here are simple, effective methods to correct this:


  • Don’t employ checkbook management.  Do not make purchases based on the amount of money in your checking account.  Use your balance sheet or a cash-flow statement to determine cash availability.


  • Spend less money than you take in.  If you have a monthly, quarterly or annual budget based on anticipated business and anticipated net profit, spending less than you earn enables you to accumulate cash.


  • Decrease your “turn time.”  This is the amount of time it takes you to complete and collect payment for a contract once it has been approved.  For example, if a contract takes six weeks to complete, you have eight turns per year (48 weeks* divided by 6 equals 8 turns.) The more times you can turn your money in a year reduces the amount of cash necessary to operate your business. (* 52 weeks less lost time and holidays) 


  • Pay your bills on time and ask for a discount for prompt payments.  A 2 percent discount for prompt payment on the 10th of each month will earn you 37 percent when compounded annually.  You could borrow money at 6 to 8 percent to pay your bills on time, and that loan would earn you big dollars in return.


  • Use “cut-off date” purchasing.  If you purchase from a vendor who offers 30-day terms and sends a statement at the beginning of each month for shipments made through the 27th day of the preceding month, place large orders after the 27th or in the first week of the new month.  Use a credit card and extend the payment due date by another 30 days.


  • Convert from weekly to biweekly payroll.  This will increase your cash on hand by the value of one week’s payroll and reduce bookkeeping entries from 52 to 26. Most modern companies no longer pay weekly. You will need a plan to introduce this to your employees if they are used to being paid weekly.


  • Reduce your accounts receivable.  Collect all balances on the day the work is substantially completed, and collect for all change orders or extras when they are executed.


  • Offer customer discounts for prompt payment.  Word your cash contracts in the following way: The balance of __________ is due on the day the specified work is substantially completed. If paid on the date of invoice, which shall be considered the day of completion, the customer shall be entitled to a discount of __________. Balances paid after the date of invoice are subject to interest at the rate of __________.


  • Require deposits.  Require deposits on all sales; they contribute to cash flow. For corporations, they are usually treated as liabilities and represent no tax consequences until a contract is completed. Deposits on sales made to homeowners are regulated in some states.


  • Require progressive payments.  Payments upon delivery or partial completion speed up the collection process and enhance cash flow, particularly on large cash jobs.


  • Cost avoidance.  Postpone spending wherever possible but not if the postponement would cause an increase later, for example, on equipment maintenance.


  • Cost elimination.  Do away with operations that aren’t profitable or only marginally productive whether it is a product or an outmoded procedure. Every company has a few sleepers and sacred cows. Get rid of them.


  • Cost reduction.  Set measurable goals and monitor them. The worst mistake you can make is to enforce an across-the-board percentage cut in costs. It’s unfair, impractical and, in the long run, ineffective.



These changes are neither complicated nor simple. They require thought and discipline, but they represent the keys to increasing cash flow.