10 ways to manage cash flow

Cash flow—how much money is flowing into and out of a business and at what rate—is an easy concept to understand. Still, not every roofing contractor is fully aware of the effect cash flow has on his company's bottom line. That's probably because the importance of cash management is much easier to recognize in some types of businesses than it is in others.

Consider home building, for example. When a builder takes on hundreds of thousands of dollars in short-term debt to build new homes, it's obvious he must generate substantial positive cash flow in a hurry if the business is to survive.

Of course, the situation for most roofing contractors is not that dramatic, but generating and managing cash flow are critically important in even the smallest roofing operation. Losing control of money has generated more financial headaches for small-business owners than temporary red figures on the bottom line. On the other hand, a sensible cash-management system can provide a life-sustaining cushion during those inevitable slow times when the telephone isn't ringing as often as you'd like.

Once you accept the importance of cash flow in your business, you'll find it easier to stick to the rules of good cash management. Following are 10 powerful techniques that can help you improve cash flow and profits.

1. Never allow your money to be idle.

If you don't already have one, open a money market account and link it to your business checking account via telephone or online transfers. Deposit all daily receipts into the money market account where they immediately will start accruing interest. This step may not seem worth the effort at the current paltry interest rates, but this is a temporary situation. Interest rates already have begun to inch up, so your efforts now will pay off more handsomely in the future.

Never deposit receipts directly into your checking account. Keep a minimum balance in the checking account, and transfer cash by telephone or online only as needed to cover checks written. The banks have made this technique so easy there no longer is any reasonable excuse for not using it.

The worst money sin of all: leaving checks or cash in a desk drawer until you can get to the bank. Using every cent of your money to make money is the mark of professional cash management.

2. Don't be timid about using other people's money.

We've all heard stories about people who have built large, successful businesses without ever borrowing a cent, but they clearly are the exceptions. At the current low interest rates, careful use of credit can be one of your most effective business-building tools.

Most financial professionals are uncomfortable with extensive use of credit for personal affairs. Business, though, is a different matter. To begin with, the costs of borrowing are legitimate tax deductions for businesses. It makes more sense to spread out the cost of capital purchases than to put stress on your cash flow by laying out large amounts of cash you could put to productive business use. Credit, when used in a sensible, controlled manner, is a powerful profit enhancer.

3. Consider leasing.

Leasing products for personal use generally is not a good idea. Most accountants agree leasing is the most expensive way to maintain a personal car. But business is a different animal.

"The nature of business accounting is such that leasing can be the most sensible approach to many types of capital investment," says Thomas Normoyle, a certified public accountant based in Huntingdon Valley, Pa. "It usually makes sense to lease if you will be able to use the cash in your business or in your investments to earn a better return than the cost of leasing."

Talk to your tax adviser about this the next time you're considering any purchase of capital equipment, including trucks or other vehicles that might be leased.

4. Diversify to keep cash flowing.

Diversification is an important strategy for any business subject to seasonal or economic fluctuations. When your employees are idle, any work is better than no work. Consider offering services or products at prices that do not satisfy your usual parameters of profitability during slow periods. That approach makes sense by providing work and some cash inflow where there otherwise would be little or none.

5. Spread the gospel.

To manage cash, you must have a steady flow coming in. Many roofing contractors keep so busy with day-to-day problems they never get around to putting together a business-building marketing program. That's a serious mistake. Marketing is an essential ingredient in the recipe for growth—even survival—for any small business, especially one that deals in a highly competitive and seasonal service such as roofing. Yet many contractors shy away from all but the most obvious ways to promote their businesses. For some, their entire marketing program consists of an expensive ad in the telephone directory.

As a roofing professional, you may not feel comfortable promoting yourself and your business. That's understandable, but it's a potentially costly handicap.

Building a growing, profitable roofing business requires an ongoing marketing program. There is no other way. Competitive prices alone won't do it. A high degree of professional skill alone won't do it.

6. Don't be in a big hurry to pay your bills.

There's good reason why checks are slow to come in from some of your accounts receivables. It's because hanging on to cash as long as possible allows money to draw interest and remain available to the person paying the bills.

That's why you should set up a system that provides for paying bills only when they are due. It's easy to do and is another mark of professional cash management.

But don't go overboard and jeopardize your credit standing by paying bills late. Pay your bills when they are due—not before, not after.

And keep an eye on the state of postal deliveries. If it appears a delay in deliveries may be on the horizon, allow a little extra time for your payables to arrive to avoid loss of discounts or late-payment fees.

7. Be aggressive about collecting accounts receivables.

If you do your billing, it's important not to allow receivables to go untended. You've earned that money; you have a right to it; you need it.

Most roofing contractors use contracts that require full and final payment on completion of a job, but that's not a guarantee against unusual situations such as customers who aren't home, corporate or government jobs that have to go through "the home office," and other assorted reasons for delayed payment. These are the situations that can cost you if you are casual about collecting money owed to you. Although paperwork may not be your favorite pastime, setting up an accounts receivable file and following through on late payments is as important to your financial success as the quality of work you do.

If your customers learn you are cavalier about money owed to you, you can be certain they will stretch your patience (and your cash flow) to the limit.

8. Maintain a cash cushion.

Whenever possible, keep enough cash in interest-bearing accounts to cover typical operating expenses for three months to six months. There is nothing like the peace of mind and self-confidence that comes when you don't have to sweat out next week's payroll during a business slowdown. Also, keep in mind your cushion money is making money for you in those interest-bearing accounts.

9. Develop a personal relationship with your banker.

Handling money is a banker's job, and most are good at it. Even if your roofing business is relatively small, it's a good idea to have a personal relationship at the bank where you do business. Discuss your financial picture honestly with the manager of your local branch. You'll get some good ideas and a favorable ear should you ever need a little financial help.

10. Let your computer help you manage your cash flow.

Whether your business is large enough to make use of one of those heavyweight commercial software packages or whether you use accounting programs such as Quicken® or Money,® trust every aspect of your finances, including personal investments, to your computer.

The financial reports and analyses modern software can produce can be vitally important tools for improving cash flow and bottom-line profits. The speed and convenience with which you can produce such reports as income/expense by category, profit-and-loss statements, and open invoices will make the job of managing your contracting business easier and more profitable.

Even if your business is large enough to farm out record keeping, consider putting your finances into one of the popular software packages designed for small businesses and personal finance. They are infinitely easier to use than they were a couple of years ago.

More important, they will teach you in dramatic fashion how much you can benefit from a sensible cash-management system.

Taken individually, effective cash-management techniques may seem inconsequential. However, when you blend them together in a consistent manner, they will form a significant and permanent contributor to your bottom line and economic future.

William J. Lynott is a former management consultant and corporate executive based in Abington, Pa.