Cash: A Common Sense Approach

When you work for a large corporation you don’t spend much time worrying about cash.  When I was a General Manager of a $100 Million Division for a large multi-national corporation that had over $1 billion in cash I never worried about where the money was coming from, I just spent it. When I started my own electronics company I ran out of cash within the first few months. I had to raise more money by selling more stock. After that time I didn’t run out of cash again for 14 years.

Some of the most successful companies in the world are those that grow at astounding rates. Sales soar, but so do costs in most cases and cash becomes the most important aspect of the business. Without available cash your company could be put on credit hold or cash-on-delivery for materials necessary to produce your product. You could also go bankrupt.  One of my good friends grew a company from nothing to over $50 Million in sales in three years, but he ran out of cash and had to file for bankruptcy

One of the most important rules in business is to be able to meet the cash demands of your payroll. That should be your number one priority. If you miss payroll one time its not long before your employees are looking for another job in a company that can meet their cash needs. There were times when my partner and I waited a few days before we cashed our paychecks just to make sure we had enough money in the bank to pay all of our employees first.

How do you prevent running out of money?

1.      Establish a line of credit with your bank long before you need it. Banks are eager to serve your needs when you have cash in the bank and you are successful.

2.      Establish close relationships with your customer’s payables managers. I always took them to lunch at least every quarter so when I called they didn’t know if I was asking them to pay me or if I was calling to take them to lunch. When we did go to lunch I always got a check from them.

3.      Talk to your customers about early payment. My company was one of the smallest doing business, but we gave them excellent service and we were thought to be one of their top suppliers. My largest customer paid me in 15 days. Be careful about offering discounts for early payment because some will take the discount and still not pay you for 60 days.

4.      Know how much cash you are going to collect each week before you make out your checks to your suppliers. Project your cash requirements for at least 3 months in advance. Call your customers to find out if you will be getting a check from them when it is due. I met with my controller at least twice a week to see what checks we had received and if there were any problem payers. I had my controller set up a running cash analysis that looked like a household budget.

5.      If you see that you are going to run out of cash in advance (remember it was 14 years later that it happened to my company) call your best customer and see if you can borrow the money from them. I had run out of cash because my best customer had not needed my service for 2 months, which was most unusual, so I did not have the receivables to collect from them. I called one of their board members and told him the situation. He told me to fly down with my cash flow plan and meet with him. I had a check for $100,000 in 2 days and had to pay back the note over a one year period of time starting in 6 months with no interest. All he wanted was a 1% discount on all products that his company purchased until the note was repaid.

Having enough cash is probably the most important aspect of a small business. Knowing how to get it is mainly common sense.