Cash flow is the life blood of every business. According to a U.S. Bank study, poor cash flow management causes 82% of U.S. business failures. Although seemingly counter-intuitive, many experts advise putting cash flow management before profits.
While profits are how a nursery survives, a failure to manage the operation’s cash flow can mean running into problems that one profitable accounting period might not be able to offset.
Another study, this one by Intuit, revealed that 61% of small businesses around the world struggle with cash flow and 32% are unable to pay vendors, pay back pending loans, pay themselves or their employees due to cash flow issues.
Cash flow management: 101
In essence, cash flow is nothing more than the movement of money in and out of the nursery business. Cash flows into the business from sales of goods, products or services. Money flows out of the business for supplies, raw materials, overhead and salaries in the normal course of business.
An adequate cash flow means a steady flow of money into the business in time to be used to pay those bills. How well the nursery’s cash flow is managed can have a significant impact on the bottom-line profits of the business.
More often than not, the operation’s cash inflows will lag behind its cash outflows, often leaving the business short of money. This shortage, or cash flow gap, represents an excessive outflow of cash that may not be covered by a cash inflow for weeks, months or even years.
Properly managing the operation’s cash flow allows that cash flow gap to be narrowed or closed completely before it reaches the crises stage. This is usually accomplished by examining the different items that affect the operation’s cash flow — and looking at the various components that directly impact on cash flow. This analysis can provide the answer to a number of important questions such as:
- How much cash does the business have?
- How much cash does the business need to operate — and when is it needed?
- Where does the business get its cash and spend it?
- How does the operation’s income and expenses affect the amount of cash needed to operate the business?
The “in” of cash flow
In a perfect world, there would be a cash inflow, usually from a cash sale, every time there is an outflow of cash. Unfortunately, this occurs very rarely in an imperfect business world. Thus, the need to manage the cash inflows and outflows of the business.
Obviously, accelerating cash inflows improves overall cash flow. After all, the quicker cash can be collected, the faster the business can spend it. Put another way, accelerating cash flow allows a business to pay its own bills and obligations on time, or even earlier than required. It may also allow the business to take advantage of trade discounts offered by suppliers.
An important key to improving the nursery’s cash flow is often as simple as delaying all outflows of cash as long as possible. Naturally, the operation must meet its outflow obligations on time, but delaying cash outflows makes it possible to maximize the benefits of each dollar in the operation’s own cash flow.
As mentioned, outflows are the movement of money out of the business, usually as the result of paying expenses. If the business involves reselling goods, the largest outflow will most likely be for the purchase of inventory. A nursery’s biggest outflow most likely involves the purchase of plants, raw materials and other components needed for the growing process. Purchasing fixed assets, paying back loans and paying the operation’s bills are all cash outflows.
A nursery can regain control over their finances by adopting best practices and proper tools for invoicing. A good first step involves how the operation pays its bills.
Many credit cards have a cash back bonus program. Even if the program offers only 1% cash back, that could equate to a sizeable monthly amount for many nursery owners and operators. Of course, because credit cards tend to have a higher interest rate, they should only be used if the balance can be quickly paid off in full.
Improving the invoicing process is another key step in cash flow management. A nursery can adopt incentive strategies to be paid faster. A business enjoying a 10% gross margin that offers a 2% rebate in exchange for early payments might not be appropriate. Giving away small extra services, on the other hand, might work. Incentives might include the following:
- Small additional services
- Discount for early payments (balance paid before a certain date, or yearly invoice vs. monthly)
- Greater flexibility (for instance: a down payment required to book a delivery date).
Some customers are just late payers and need to be nudged. The way that dunning is handled can, however, greatly affect the collection process. Timing and the quality of message content are the two main factors in the success or failure of these prods.
The manner in which the nursery gets paid not only affects its profitability but also its cash flow. Today, paper checks remain as the standard method of payment. However, paper checks are slow, highly susceptible to fraud and bear “hidden costs” such as additional work and back office processing. They are also inadequate for recurring invoicing.
Something as simple as asking customers to switch to electronic funds transfer (EFT or ACH), providing incentives, etc., are among the tips that can be offered for faster, more secure, reliable and cheaper payments.
Improving cash flow
Profit doesn’t equate to cash flow because, as mentioned, cash flow and profit are not the same. There are many factors that make up cash flow, such as inventory, taxes, expenses, accounts payment and accounts receivable.
The proper management of cash outflows requires tracking and managing the operation’s liabilities. Managing cash outflows also means following one simple, but basic rule: Pay your bills on time — but never pay bills before they are due.
Having a cash reserve can help any business survive the gaps in cash flow. Applying for a line of credit from the bank is one way to build that cash reserve. Once qualified, lenders will grant a predetermined credit limit which can be withdrawn from when needed.
Another option might be frugality. If you’re aiming to keep the nursery lean, evaluate it. Is the purchase of new equipment really necessary? Is hiring new employees really cost-effective? Weighing the pros and cons of all business needs and wants enables the business to retain cash flow and avoid unnecessary expenses.
Cash flow gaps
Remember, the cash flow gap in most businesses represents only an outflow of cash that might not be covered by a cash flow inflow for weeks, months or even years. Any business, large or small, can experience a cash flow gap — it doesn’t necessarily mean the business is in financial trouble.
In fact, some cash flow gaps are created intentionally. That is, a business owner or manager will sometimes purposefully spend more cash to achieve some other financial results. A business might, for example, purchase extra inventory to meet seasonal needs, to take advantage of a quantity or early-payment discount, or might spend extra cash to expand its business.
Cash flow gaps are often filled by external financing sources: revolving lines of credit, bank loans and trade credit are just a few external financing options available to most nursery owners and operators.
Cash flow loans
Cash flow-based loans rely on the value of the operation’s cash flow. If the operation has a strong cash flow stream, it can be used to get significant loan amounts even if there are few business assets. Although cash flow loans can be expensive, they play a key role in a business that is expanding.
An advantage of cash flow loans is the repayment period. These loans are usually designed according to the needs of the borrower with repayment periods lasting between five and seven years. And, since cash flow loans are different from asset-based loans, rarely does collateral have to be put up.
Flowing cash flows
Assessing the amounts, timing and uncertainty of cash flow is the most basic objective of cash flow management. Positive cash flow indicates the liquid assets of the business are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against unanticipated financial challenges. The impact of a negative cash flow can be profound with so many operating on margins so thin that frequent lost opportunities will put them on the path to closing their doors.
Every business can improve their cash flow. Of course, in order for this to happen, they need to adopt best practices in the way they invoice, follow up with customers and monitor outflow. Without the help of a qualified professional, these best cash flow practices may be more difficult to achieve.