What is No. 1 in your business? Said differently: What is the one thing you must have to stay in business? It’s a question. Write down your answer now, before reading the rest of this column.

You’re back. Great!

We’re not done with the questions. Grab that pencil again. Jot down the answer to these five questions:

• When you pay your bills each week, what do you need?

• When you make payroll each week, what do you need?

• When you purchase inventory for a new truck, what do you need?

• When you buy a truck, what do you need?

• When you go to the bank to get a loan, what do you need?

What you should have is the same answer for all six of those questions. Yes — your answer should be, or at least resemble, positive cash flow.

Have a doubt? Try staying in business without positive cash flow (don’t try this at home, it’s a losing game).

When talking cash flow, I can’t help but think it’s a math equation. That’s why many people don’t do it, because there are many moving pieces to the formula.

So why do you need to manage your cash flow? It’s simple really, yet I find a mere one out of 100 contractors really know how to manage cash flow. Need convincing?

Think about the importance of this scenario: You walk into your shop Monday morning and for the fourth consecutive week you have more calls than you can run. You decide to buy another truck, purchase the inventory for truck stock and place an ad to hire a tech.

Maybe you’ve had this scenario: You have been battling your phone and computer systems for more than a year. You know upgrades to these systems will help you be more efficient and maximize your opportunities with each call. You are presented with a reliable progressive solution to upgrade these systems. Do you have the cash flow to do this?

The actions in both scenarios take what? Cash! Can you afford to write a check today for all of these purchases? Or would you be better off borrowing the money from your bank?

Let’s say you choose to borrow the money from your bank because your account doesn’t have enough funds to cover these expenses/purchases.

Do you think your bank will automatically lend you the money? It will be more likely to approve your loan if you have enough what? Right again, cash! You must show your business can generate a steady positive cash flow. If you can’t present a positive cash flow over a period of time, your bank will send you, your new truck, equipment and systems packing.

So how do you manage cash flow? Like I said, it’s simple really when you follow this principle: “Don’t spend more than you have.” This goes for you personally and for your business.

The more important question might be: “How do you know if you have a sustainable, positive cash flow?” It’s just a simple math calculation. However, knowing which numbers to look at might not be as simple.

Here is the equation I use (see above).

Understanding the tools at hand

This cash flow equation is sometimes called a quick ratio, and the interpretation for acceptable aging for accounts receivable can differ by industry groups.

I created a cash flow sheet for my own companies. I’m sharing above (see slide). This tool helped me manage the cash flow (or quick) ratio weekly. In my business, as long as my quick ratio exceeded 1.5, I knew I had sufficient cash to reinvest into my business (new trucks, new tools, advertising, owner’s salary, etc.)

When my quick ratio dropped below 1.5, the spending party would stop!

Why did I use that number? Because a quick ratio of 1.5 tells me I generate $1.50 in cash for every $1 I owe. Now, since cash flow is the No. 1 consideration for my business, a quick ratio of 1.5 is my comfort level. However, many of the plumbing and heating contractors I coach set their benchmark at 2.0 and some even drop it to 1.1. It’s totally up to you and your comfort with risk. The lower the quick ratio, the higher the business risk; the higher the quick ratio, the lower the business risk.

When you start looking through the cash flow forecast, one of the things to remember is timing. It’s important to review your cash flow on the same day, at the same time every week. This will help you with a more consistent estimate for cash flow and avoid any fluctuations during the week. If you need to, set up a weekly appointment with yourself and don’t cancel. For me, it was every Friday at 10 a.m.

Here are some other keys to using and understanding this cash flow tool:

1.Expenses. I like to look out 13 weeks. For this model to work, you must be able to project the following expenses for the next 12 weeks and enter them in each week:

• Payroll;

• Accounts payable;

• Notes payable;

• Rents;

• Petty cash purchases; and

• Tax planning payment months.

2. Sales. For sales I project only one week at a time. Remember, sales only includes money you collect from your customers. Sales does not include unpaid balances you record in accounts receivables.

3. Accounts receivables. Review your AR report and determine how much of it you will be collecting the next week.

With this information, you’ll be able to start managing your cash flow. Note on the bottom of the cash flow example that the last line tells you your quick ratio. Follow along and do the math.

You’re not done yet. Look out for the 13 weeks to see if you have any big payments coming up. If you do, include it in your expenses, then make sure your cash would stay above your quick ratio limit before making additional purchase decisions during this time period.

After each week has passed, insert the exact amount you spent or earned for that week. This keeps your tracking current each week.

 If you’ve never thought about managing cash flow, just try it. You’ll get the hang of it after you go through the process each week. Remember, when you’re filling out your worksheet, it’s a projection — not perfection. You are working on a weekly estimate for cash flow. The effort and time you take each week to project your cash needs and reserves will save you stress and sleepless nights down the road.  

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