Cash Flow: Likely The Biggest Issue Facing Your Business

By Chuck Wilson, NSCA Executive Director

In the systems integration business, we seem to spend an inordinate amount of our time focused on technology. This is only natural; true passion for technology is what led many of us to pursue this career path, and there’s something satisfying about forming technology and components into a system that meets a need, or improves production values, or helps save lives—and so much more. Plus, we actually get paid for it!

But there’s also another reality. The vast majority of systems integrators operate as small businesses and one of the biggest—if not the biggest—issues facing a small business is cash flow. And it’s of particular concern in light of the aforementioned passion for systems and technology, where “more mundane” business matters can get pushed to the side. Sadly, I’ve seen this trip up far too many smart people in our industry.

Do you understand how your business’s cash comes and goes? Sure, cash comes in via payment for your services, and hopefully, this happens at a relatively steady level. If not, you’re probably experiencing cash flow problems, because cash outflow is constant: payroll, payments for large shipments of inventory, facilities, transportation, a seemingly endless list of “minor” expenses, taxes, travel – the list goes on and on.

The best advice on the subject is to work with a qualified financial professional, usually an accountant. Sure, you’re adding another expense, but a good accountant (or bookkeeper) will save the business more money in the long run, in addition to helping it operate as smoothly from a financial standpoint as possible. And this leaves you free to focus on the actual productive work of successful systems projects and serving your customers.

Still, it’s wise to develop a working understanding of your business finances so that you can speak intelligently with your accountant and also make appropriate decisions on your own. After all, no one should be more interested in your money than you!

There are a wide range of factors in play when it comes to cash flow, with an equally wide range of educational materials accessible in print form and online (often free). Therefore, my goal here is not to get into the specifics better left to business experts, but rather, to point out that your livelihood is at risk if this issue is ignored.

As an overview, the essence of good cash flow management comes down to cash forecasting (also called budgeting). As the name implies, this is simply a forecast of cash results based upon assumptions about conditions and actions you expect during a set period of time. Usually these time periods are defined as long-term (a year or longer), medium-term (a month to a year), and short-term (a week to a month).

To set up a forecast, you’ll need your financial statements—an income statement and a balance sheet. The most important thing is that these statements be accurate, whether prepared internally by you/someone at your business or by an outside resource such as an accountant. Get comfortable with reading and understanding these statements—it might be painful at first, but it’s the only real way to understand your finances.

One of the biggest problems I’ve seen with systems integration firms (and other small businesses as well) is what’s called a cash flow “gap”—simply, this is when the money that’s coming in verses the money that’s going out don’t match up, leading to shortfalls. All kinds of expenses, from purchasing materials necessary to do the work, through all sorts of fees, often must be paid before you get paid.

This is where you must keep a close eye on cash flow, forecast potential problems, and be prepared to deal with them. An easy way to do this, on a monthly basis, is comparing unpaid purchases to your sales that are due at the end of each month. If purchases are greater than sales due, you’re probably looking at a cash flow problem.

Therefore, money needs to come in faster. There are a lot of ways to help this along; for example, don’t wait to invoice at the end of the month, rather, send customer invoices immediately after delivery of your work. Think about it—you might save as much as 30 days in your cash flow process.

Another tactic that’s often effective is to offer customers a discount for early payment of invoices. It doesn’t have to be a huge amount, say, one to two percent for payment within two weeks. (And if you’re offered these types of deals by your suppliers, by all means, take advantage. The savings can add up pretty quickly.)

Further, while most of us tend to be sensitive to our customers, we can’t afford to be too sensitive. Don’t be too generous in allowing credit, and keep a particularly close eye on customer credit issues and terms.

Something particularly valuable to deploy for systems projects that are going to span a decent length of time is to arrange for the customer to make payments along the way. And, you can also set up a policy where the customer pays a certain percentage of the total invoice up front, before work even starts.

Finally, you must actively pursue collections of past-due invoices. This cannot slip! Stay on top of it, and don’t let the prospect of collecting what you’re rightly owed be intimidating. After all, you’re the good guy in the scenario, presumably providing work, products and services of high quality, and the least that should happen is to be paid the amount as agreed.

Many business software programs help in tracking past-due accounts, and it’s also vital to have a strategy for collections in place. This might include regularly sending letters to the customer regarding account status, phone calls to the people responsible for accounts payable, and if all efforts of this type fail, identifying and employing the services of a collection agency.

This is just a brief overview of a critical aspect of your business. Again, I urge you to take cash flow seriously and devote the necessary time and effort in becoming educated on the issue. The bottom line? It’s your bottom line that’s at stake.