Cash Flow: Small Business

When I was a kid Looney Tunes kept me laughing. One episode in particular always made me laugh. For you youngsters Daffy Duck and Bugs always had a rivalry. In this one episode, Daffy pulls out all the stops and wows the crowd getting a standing ovation. What does this have to do with cash flow? Read on!

Last month a young lady called me. She and her husband owned a lawn service and she wanted some information on selling. When I get these calls I try to get a little intel and in the age of the internet, a quick Facebook post revealed a young family. They owned a lawn service and a tree company. I could guess at age based on her FB profile and asked her "So why are we thinking about selling?"

She then proceeded to tell my about the pains of growth. Now after some 100 plus businesses sold in the service sector, this was nothing new. Payment terms, Labor issues, equipment repairs etc. As we did a deep dive based on some KPI's I have about the business in terms of labor I asked her the following questions:

• How do you pay your people? Weekly or Bi-Weekly
• What are your payment terms? Net 30, 45, 60?
• How much commercial business do you have vs residential? Are the terms different?
• What is your monthly Cost to just run the lawn service expense? Fuel, Labor, Rent, Insurance
• What is your billing cycle?

Her Responses:

• weekly (a common issue in lawn care)
• We bill in arrears and net 30 terms
• 20% commercial and 70% residential (also common) and the revenue split evenly with commercial dragging 45 to 60 days
• She didn't know but guessed at 13,000 to 20,000 depending on Season.
• Monthly

All of the were very very standard responses. Now Her business billed about 25k in revenue a month in service revenue. So I asked her if she had another 25k in margin would she be in a better position to run her business to which she replied "of course"

Flashback

Some 35 years ago when I worked at Nestle selling bottled water I would try to get a copy of a competitor's invoice. With the invoice, I could tell their position with a client in pricing, some packaging strategy and some other stuff as well. Well one day I noticed something odd. They were invoicing on a 28 day billing cycle. Now being the product of Catholic School and the multiplication tables having been pounded into my head I thought "why did you say 28 days? " why not just say a month? After all there are 4 weeks in a month....oh wait there isn't.

Fast Forward

Service businesses are often where people start their entrepreneurial journey and we all know how little our high schools and colleges teach about business strategy at the tactical level. Marketing and Branding is top of mind at business school.... QuickBooks, cash flow management, and the import of your billing cycle not so much.

I told the young lady the story of the 28 day billing....had to point out the math of 13 cycles in a 365 day year. Drilled down into the import of her billing at the beginning of the month vs the end of the month and how paying her people every two weeks would be better than weekly.

So I circled back and she has begun implementing these changes on new customer agreements. Her payroll is being switched to every two weeks and on the agenda will be invoiceing at the end of the first week of the month. After all you cant turn an Aircraft Carrier on a dime and these changes will be gradual but the net effect is that assuming no major changes in expense the subtle adjustments will greatly improve her cash flow and solve her problems.

Now Back to Daffy and Bugs.

These tricks of the trade are no replacement for sound business strategy and discipline but you get my point. You only get one shot to make these types of corrections. Be disciplines and Learn and you will get a round of applause as well.

I Can Only Do It Once