Cash Is King: 6 Tips for Improving Cash Flow

Cash Is King: 6 Tips for Improving Cash Flow 2018 CEDIA Expo San Diego Copyright Materials This presentation is protected by US and International copyright laws. Reproduction, distribution, display and use of the presentation without permission of the speaker is prohibited. 2018 The ShinerGroup. All rights reserved. 2018 The ShinerGroup. All rights reserved. Page 1

Instructor Introduction Leslie Shiner - Owner of The ShinerGroup o LShiner@ShinerGroup.com Financial & management consultant for over 25 years o MBA in Accounting and Finance from U.C. Berkeley o Advanced QuickBooks ProAdvisor o Sage Certified Consultant CEDIA Fellow CPA Practice Advisor Top Thought Leader Author o A Simple Guide to Turning a Profit as a Contractor o (www.moneymazebooks.com) fellow Learning Objectives Understand the importance and impact of managing cash flows and how it directly affects the bottom line Apply a procedure for managing receivables and payables Create a Cash Flow Projection specific to their own company needs Apply 6 tips to immediately improve cash flow 2018 The ShinerGroup. All rights reserved. Page 2

Cash is King! Without adequate cash flow, you cannot survive Did you know that many bankrupt companies are profitable? Having a profitable business does not always assure that you will have positive cash flow To avoid bankruptcy The cash inflow must be adequate to meet operational requirements And allow for expansion, profit distribution and taxes Cash is King! Questions to ask yourself today: o Why should I develop short term (weekly) and long term (monthly) projections? o How can I develop metrics around projecting cash flow o WSIC? Or: W (tf) SIC? 2018 The ShinerGroup. All rights reserved. Page 3

Look at the Big Picture Cash flow is more than just income and expenses Money in isn t just from sales and collecting receivables: o Borrowing funds, selling assets, acquiring investors, earning investment income Money out isn t just from paying expenses o Repaying loans, purchasing assets, paying taxes, making profit distributions Cash Flow equals All Money In Minus All Money Out Net Income vs. Cash Flow Income Statement Sales COGS Operating Expenses = Net Income Cash Flows Beginning Cash Balance Ending Cash = Flows Net Income does not equal Cash Flow 2018 The ShinerGroup. All rights reserved. Page 4

Cash Flow Vicious Vortex Cannot take advantage of prompt pay discounts Cannot negotiate more favorable terms Cannot receive material if credit holds are placed on account Incur additional interest expense, finance charges and penalties Cash flow troubles just create more cash flow troubles Cash Flow Vicious Vortex Cash flow troubles just create more cash flow troubles 2018 The ShinerGroup. All rights reserved. Page 5

6 Tips to Improve Cash Flow 1 Prepare a cash flow projection 2 BEBO 3 4 Control purchases OPM 5 Take all discounts 6 Be aware of over and under billings Tip #1: Cash Flow Projection Benefits of Cash Flow Projections o Maximize use of working capital Balance expenditures with income Forecast when to borrow Forecast when to invest o Improve supplier/vendor/banker relations o Take advantage of opportunities as they come up o Stop being caught off guard o Keep projects on track Managing cash flow will improve profitability 2018 The ShinerGroup. All rights reserved. Page 6

Question for you Do you prepare a Cash Flow Projection? Yes, all the time Yes, sometimes No, but I know we should No, we don t see any value in it Cash Flow Projection Steps 1. Start with your Profit and Loss (P&L) Statement from last year o Review data for patterns and trends o Look for seasonality issues o Estimate revenues and expenses for upcoming year, incorporating goals and backlog o Create 12-month projection 2. Look at other cash flow, not in P&L o Capital purchases such as equipment or vehicles o Loan payments or credit line payments 2018 The ShinerGroup. All rights reserved. Page 7

Steps - Continued 3. Budget for the unusual, infrequent payments o Liability insurance and worker s comp deposits, taxes, etc. 4. Know the pattern of cash flows o Schedule: yearly, monthly, weekly 5. Tailor to your business Different Thinking Classify costs into three types 1 Variable Fluctuates with the job, specifically materials and subcontracts 2 Recurring Reclassify payroll as a recurring cost Other overhead costs 3 Infrequent Those costs that are not on a monthly schedule 2018 The ShinerGroup. All rights reserved. Page 8

Create Company Cash Forecast Starting Cash Balance Add: o Job income, listed by job Subtract: o Variable materials and subcontractors o Recurring labor and overhead o Infrequent - unusual or extra costs Equals o Cash available, (or cash needed!) Then add or subtract credit line as appropriate Sample Cash Flow Beginning Balance Variable Cash In Jobs Other Cash Out Materials Subcontractors Recurring Cash Out Labor Rent Utilities Infrequent Cash Out Work Comp Deposit Tax payments Net Cash Flow Ending Balance January February March April 2018 The ShinerGroup. All rights reserved. Page 9

Software Shortfalls Software only includes bills received and invoices sent Projected cash out only counts when bill is received o Many recurring costs aren t entered into payables o Monthly rent, loan payments, weekly labor Projected cash in only counted when invoiced Too much data re-entry so why bother? Think Through the Problem If the only tool you have is a hammer, everything looks like a nail Use a different tool Create a spreadsheet o Start with A/P and A/R o Then add all the rest Look at ways to make your software tell you what you need to know 2018 The ShinerGroup. All rights reserved. Page 10

Monitoring Your Projections Keep very specific o Weekly and monthly o Estimated to actual comparison Use available information o A/R aging o A/P aging o Typical monthly expenses o Special expenses o Sales reports Know Your Burn Rate How much money does it cost to stay in business each month? o Look at total overhead o Divide by 12 That s the cash out the door every month o Or do it weekly Can your jobs cover your burn rate? 2018 The ShinerGroup. All rights reserved. Page 12

Tip #2: BEBO Bill Early, Bill Often Focus on Invoicing Invoice smaller amounts and send more frequently o o o Makes client more committed to the project More palatable and manageable for client Allows you to discover earlier if the client is not happy or is having financial problems Invoice change orders as soon as possible 2018 The ShinerGroup. All rights reserved. Page 13

Focus on Collections Have a planned approach for collections o Project managers and field crews commit to supporting bookkeeping rules and communications Accepting credit cards can improve cash collections o Include the cost of credit card fees in pricing the proposal Start collection process as soon as invoice is sent o Friendly call to confirm invoice was received, reminder when payment is due o Allows for communication and questions and see if there are open issues Charge finance charges o Send a message to the client that payment as important as performance o You can always credit back to look like the Good Guy Conflict Avoidance is Not Helpful What if client doesn t pay on time? o Unpaid invoices mean trouble Extending credit to clients only increases sales, not profit o Are you willing to walk away from the job? Customer relationships can make or break cash flow: o Learn about the three F s Feel, felt, found o Leave out the fourth F Do you have unhappy or angry clients? o Deal with it promptly 2018 The ShinerGroup. All rights reserved. Page 14

Tip #3: Control Purchases Utilize a Purchase Order system o Not a purchased order system o No purchases without prior authorization o Control employee credit card spending with strict limits Review all automatic monthly payments o These can include increases that you aren t even aware of o Look at all maintenance service contracts Would paying hourly fee for services be less expensive? Control Purchases Review all payment obligations o Negotiate reduced rent on lease obligations Analyze all equipment and vehicles o Do you really need and/or use them all? o Evaluate the rent/lease/buy decision 2018 The ShinerGroup. All rights reserved. Page 15

Billing Methods Matter Enter all bills as fast as possible to track job specific costs o Don t get caught off guard with unbilled costs at end of job Match invoicing cycle to accounts payable cycle Tip #4: OPM Other Peoples Money 2018 The ShinerGroup. All rights reserved. Page 16

Use the Client s Money, Not Yours Invoice and collect! Set the client's expectations on payments You might be good about collecting money for equipment o But how much of your labor costs come out of your pocket? Time Purchases Accordingly Use Credit Cards to your benefit o Know your billing cycle Purchase materials on day 1 o September 1 Receive statement on day 30/31 o September 30 Pay within 15 days o October 15 Effectively floated cash for 45 days! o But beware of late payments! o Do only if you are sure you will have the cash to pay the bill 2018 The ShinerGroup. All rights reserved. Page 17

When and What Should You Borrow Credit Cards Short-term, highest interest rate with finance charges Use for materials purchases but only if you can pay off each month Credit Line Balance should fluctuate and ultimately go to zero (once in a while) Should be used to float operating expenses Term Loan Used for capital purchases such as equipment, vehicles, expansion Should not be used to cover operating expenses! Who Should You Not Borrow From? If you cannot pay your payroll taxes, you cannot stay in business 10% penalty for 3 days late payment is equivalent to 1200% per year 2018 The ShinerGroup. All rights reserved. Page 18

Tip #5: Take All Discounts Free income Improves your bottom line Negotiable call your vendors o Rates can vary Track discounts as separate line item o Increase income o Do not decrease expense o Do not pass on to the client Quiz for you If you take 2% discount, what is the equivalent annual interest rate? 2% 12% 36.5% No idea 2018 The ShinerGroup. All rights reserved. Page 19

Answer 1. Payment terms offered 2%10/net 30 2. # days additional if payment not taken 20 days 3. Divide 365 by # days in step 2 18.25 4. Multiply step 3 by discount 36.5% 5. Take discount if your cost borrowing is less than step 4 Tip #6: Be Aware of Over & Under Billings Overbillings will help cash flow o Front load the contract o Get the money up front But 2018 The ShinerGroup. All rights reserved. Page 20

Overbillings Can Be Dangerous Overbillings will overstate profit Don t run out of cash at the end of the job What happens when you: o Invoice the client for 100% of the job o Still have expenses on the job? o Where is the cash to finish the job? It is very dangerous when you need to use tomorrow s jobs to finish today s jobs The Pitfalls of Overbillings Expenses vs Cash Flow Beware Volume Cash In Expenses Time 2018 The ShinerGroup. All rights reserved. Page 21

Underbillings Hurt Cash Flow Underbillings mean that you did the work and haven t created the invoice yet o Are you financing the job? o Are you paying for all your own overhead costs? You won t get paid unless you ask for the money Growing pains o Growth will typically cause cash flow problems o As volume increases, accounts receivable will also increase and cash flow may be tight o If accounts receivable increases more than accounts payable, cash flow will be tight Cash Flow Can Fool You Revenue vs Cash Flow Beware Volume Revenue Cash In Time 2018 The ShinerGroup. All rights reserved. Page 22

Conclusion Net profit does not guarantee positive cash flow Use cash flow projection to manage cash Control spending Match receivables to payables (or vice versa) Prepare for large expenditures Use cash wisely Questions and Thank You Leslie C. Shiner, MBA Join Leslie tomorrow for more: A Contractor's Guide to the Financial Stuff 25 Down and Dirty Ways to Increase Profits LShiner@ShinerGroup.com (415) 383-6255 www.shinergroup.com www.facebook.com/theshinergroup Twitter: @TheShinerGroup Please complete and submit course evaluation fellow 2018 The ShinerGroup. All rights reserved. Page 23

Questions? Thank You! Please complete and submit course evaluations. 7150 Winton Drive Suite. 300 Indianapolis, IN 46268 317.328.4336 training@cedia.org 2018 The ShinerGroup. All rights reserved. Page 24