Cash flow is the life blood of every business. Even before the Coronavirus pandemic emphasized how important cash flow is, one U.S. Bank study revealed that poor cash flow management causes 82% of U.S. business failures. Although seemingly counterintuitive, many experts advise putting cash flow management before profits.
While profits are how a snow removal 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% of small businesses around the world struggle with cash flow and 32% are unable to pay vendors, pay back pending loans, pay themselves or their employees, due to cash flow issues.
Cash flow is nothing more than the movement of money in and out of the business. Cash flows into the business from sales of goods, products or services. Money flows out of the business for supplies, raw materials, 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 pay its bills. How well the snow removal or ice management 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 cash outflow that may not be covered by a cash inflow for weeks, months or even years.
Properly managing the snow and ice removal operation’s cash flow allows that cash flow gap to be narrowed or closed completely before it reaches the crises stage. This is usually accomplished by examining the items that affect the operation’s cash flow. This analysis can provide the answer to a number of important questions such as:
- How much cash does the business have?
- How much cash does the business need to operate – and when is it needed?
- Where does the business get its cash and spend it?
- How does 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, in our imperfect business world, this occurs very rarely. Thus, the need to manage the cash inflows and outflows of your snow and ice 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 industry suppliers.
An important key to improving the snow or ice removal 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.
Outflows are the movement of money out of the business, usually as the result of paying expenses. If the business involves reselling goods, the largest outflow will most likely be for the purchase of inventory. A snow removal or ice management operation’s biggest outflow most likely consists of payments to workers, closely followed by the purchase of raw materials and other components needed to provide the services offered. Purchasing fixed assets, paying back loans and paying the operation’s bills are all cash outflows.
Any business can regain control over their finances by adopting best practices and proper tools. A good first step involves how the operation pays its bills.
Many credit cards have a cash back bonus program. Even if the program offers only 1% cash back, that could equate to a sizeable monthly amount for many snow removal operations. 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 snow removal business can adopt incentive strategies to be paid faster. A business enjoying a 10% gross margin that offers a 2% rebate in exchange for early payments might not be appropriate. An incentive strategy 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 special service
Some customers are just 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 the message content are the two main factors in the success or failure of these prods.
The manner in which the snow removal business gets paid not only impacts its profitability, but also its cash flow. Today, paper checks remain 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. They are also inadequate for recurring invoicing.
Something as simple as asking customers to switch to 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 always 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 supplies inventory, taxes, expenses, accounts payment 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 business survive the gaps in its 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 snow and ice removal 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 business to retain cash flow and avoid unnecessary expenses.
CASH FLOW GAPS
Remember, however, the cash flow gap in most snow and ice management businesses represents an outflow of cash that might not be covered by an immediate cash flow inflow. Obviously, 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. In other words, a business owner or manager will sometimes purposefully spend more cash to achieve some other financial results. A snow and ice removal business might, for example, purchase extra materials or chemicals to meet seasonal needs, to take advantage of a quantity or early-payment discounts or 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 snow and ice management operations.
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 snow or ice removal 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 business can improve their cash flow. Of course, for this to happen, they need to adopt best practices for 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.