Are You Selling Your Way Into Bankruptcy?
As principal of an interior design practice, when you're out of cash, and can't access any new sources, it's game over. End of story. Don't let the door hit ya'...
Perhaps the fastest way to run out of cash is to—wait for it—sell MORE!
That's right; the very thing that most entrepreneurs naturally gravitate toward in times of a cash crunch is to sell their way out of the crisis. That's like telling the man in a deep hole with a shovel that the key to getting out is to dig faster.
The first thing to know about cash flow is that growth in sales always means a decrease in cash. One consulting client of mine had seen her firm grow from sales of $1.3 million to $1.8 million in just two years. She and her husband, who had hired me due to their deepening cash crisis, seemed confused when I explained the increase in sales was responsible for their problems.
There are no exceptions to this counterintuitive fact, and this is an example of how not having the “numbers person” to see this coming and prepare for it, can put a firm in a crisis position that it might otherwise have avoided. This person can be full-time or part-time, or in the best case scenario, can be YOU! But you must be able to read the early warning signals.
Because of the ability of many interior designers to get cash from clients up front (deposits and retainers) design firms can actually mitigate this problem more than most... but they cannot avoid it. In the screwy world of accrual accounting, even an increase in “profits” has little correlation to the simultaneous decrease in cash. As those sales increase, your "profits" may also increase, further confusing many as to why their cash is drying up!
It is often said that there are only two sources of cash available to a business——debt and equity. The profit your firm produces contributes to equity. But is that really cash? I've seen the shock on designers' faces as we go over their balance sheet together. They get to lines like "Owner's Equity," or "Retained Earnings," see a big number and ask me, "Where is that money?" They know it's certainly not in their bank accounts. (I generally answer, "There it is," and point to the number on the piece of paper, because I assure you, that's the ONLY place it is!)
I'll have to save an explanation of why your company's financial statements have little to do with your cash position for a later time, but for now just keep this in mind: When it comes to knowing your cash position, trust your bank accounts and nothing else!
How to increase cash:
- Ask for 100% of the purchase price of merchandise up front. Why not? They're buying it, aren't they? When you successfully do this, you have also captured your profit margin on this transaction, and thus some of the cash you receive is immediately available to pay operating expenses.
- Increase the size of retainers. Retainers are not just good faith actions, or a way to ensure the client has a little skin in the game. They are an advance on the resources you are getting ready to expend, including your time and the time of others who may be involved. Getting 1/3 of the total design fees you have estimated for a project—up front—is more than fair to both parties. This cash often has no direct cost associated with it, and is thus free and clear to be used for operating expenses.
- Accelerate the collection of invoices. Every day that invoices remain unpaid indicates that you are serving as a bank for your, often, wealthy clients. Don't finance them! Get your money. "Due on receipt" is a perfectly reasonable policy with quick and frequent follow-up reminders. Better yet, get a credit card on file for automatic billings.
- Delaying the payments of accounts payable. I see a lot of pride in some principals because they pay their bills on time...or even early! For your local printer who attends the same church as you...fine. But for big companies—NEVER! Drag them out and make them beg! They're big boys and girls and they can handle it. Be a businessman or woman, not a Boy Scout or Girl Scout. You'll end up being respected a whole lot more.
- Raise Prices. This, of course is the Holy Grail of increasing margins and cash flow almost overnight. I'll have much more to say about this topic in the future.
I'll save the actual math for another day, but let me just say that simply by adjusting the policy of how to handle accounts receivable and accounts payable, I was able to free up $127,000 for the same firm mentioned above, in just 30 days.
True, it's not really "new money," and some of it will eventually have to be paid against those accounts payable, but for a firm that was facing a cash flow crisis, it sure bought them time!
Assignment: Ask your bookkeeper (or yourself) to calculate how many days it typically takes for invoices to get paid. Then, do the same for how many days typically elapse from when you receive an invoice to when you pay it. See if you can shorten the former, and extend the latter!
More Help: My six-week course on "Getting Pricing Right" can help you to quickly optimize your pricing strategy which is the fastest way to an improved gross profit margin and higher quality of profits. Click HERE to learn more.
Coaching and Consulting: If you'd like to explore working with me one-on-one, please click HERE for more information and to schedule a complimentary call if you qualify.
Now, go earn what you deserve!