Knowing how to manage money during the good times can ensure you survive the bad times
Managing any small business can be stressful. The fact is many small businesses fail. The number one reason for small business failure is the lack of proper cash flow management, according to U.S. Bank, with some 82% of business failings attributed to this.
Even profitable businesses fail simply because of an inability to properly manage cash flow. If you are an owner-operator or small fleet owner, chances are you didn’t get into the business to manage cash flow – you did it because you enjoy the open road, the people, the “driver’s life.” But if you don’t learn how to manage your cash flow properly, you may be making money, but unable to pay your bills. How can this happen?
Consider this simplified scenario: You have monthly expenses of $30,000 (including salaries, equipment maintenance, fuel, etc.) and you have two shippers paying you $20,000 a month each to haul their loads. The shippers pay you routinely on the 15th of every month. Because you are busy driving, you use your off day on the 18th of the month to pay all your bills. You don’t have a line of credit because you’ve done the math and you have more money coming in than you are paying out. You make your payments, leaving $10,000 in your bank account.
Then your truck dies.
Between towing and repairs, you’ve now shelled out an additional $8,000 you weren’t counting on. But it’s okay, because you have $10,000 in the bank, leaving you with $2,000. Did you forget about that lost revenue from the month for loads undelivered due to the downtime? That shipper’s next payment has just been cut in half. Instead of $40,000 from the shippers for the month, you’re only getting $30,000 – just enough to cover your monthly expenses.
With no cushion left in the bank, you are now one unexpected bill away from shutting down. So how do you avoid this?
“No matter how many safeguards you have in place to protect your company’s cash, hiccups in cash flow are a business reality,” author Jared Hecht writes for Entrepreneur. “This may be no big deal if you have a cushion of savings on hand, but if your company is working from a zero account balance, one slow … month could mean instant disaster.”
Hecht advises maintaining an account balance equivalent to two months of operating expenses. “That way, even if you experience unexpected stalls to cash flow, you have reserves in place to protect yourself,” he writes.
Leading advisors suggest setting up a line of credit when the going is good. Lenders are more than willing to help businesses bringing in revenue, but it’s more difficult to secure funding in a time of need when the bank is unsure if the money will be repaid.
Trucking companies can turn to traditional banks, but there are also other lending institutions that understand and cater to transportation businesses. One of those is Triumph Business Capital.
Triumph offers factoring services, but it also offers lending tools for trucking companies. Asset-based loans is one way a fleet can ensure it has access to capital. The company also offers equipment financing, fuel cards and advances as well as back-office solutions. Because companies like Triumph work with carriers, they understand the trucking business in a way that many larger banks do not, and are generally more willing to loan money to fleets.
One approach to cash management is working out a payment schedule for your bills. David Sederholt, COO of Strategic Funding Source, Inc., suggests not paying all your bills at once.
“For a small business, cash flow management is like being an air traffic controller,” Sederholt wrote in a Forbes.com article. “You can’t have 100 planes trying to land simultaneously on two runways. We regularly see clients line up their monthly bills, sit down and write all the checks at once. They hope that they put aside enough cash or that their upcoming sales will float their payments through.”
Sederholt suggests creating three tiers of bills and then staggering your payments. Those tiers are the “must pay group,” the “important to pay group,” and the “flexible payment opportunities group.”
The must pay group is exactly like it sounds – these are payments that if you don’t make, you won’t be able to operate. Things like employee salaries and fuel would fall into this category.
In the important to pay group, you will find bills such as utility and insurance payments. These are bills that are important and must be paid, but feature grace periods or modest penalties for paying late.
Finally, the flexible payment group features suppliers and vendors who will work with you during times of crisis by extending payment terms or accepting smaller, regular payments until your cash flow problems abate.
Sederholt also advises businesses to invest in a payroll service rather than doing it yourself. “It may seem like an unnecessary cost for very small businesses, but a good payroll service can be invaluable, particularly in the collection and payment of payroll taxes,” he writes. “Rather than worry about saving the money and making progress payments to federal and state agencies, let the pros do it.”
Also, match your payroll schedule with your revenue stream. In trucking, many shippers pay on Net 30, 60 or 90 terms. Paying employees weekly may put a strain on your finances. Consider bi-weekly or bi-monthly payrolls. Sederholt says these situations will help spread out payments and reduce the frequency of payroll tax deposits.
Keep tabs on your money by using a cash flow management tool. It can be something as simple as a spreadsheet or one of many software tools designed for this purpose. This is especially helpful in an industry such as trucking where loads are delivered but payment may be 30 days away.
If you must use a credit card to manage cash flow, choose a card that offers cash back on every purchase – every little bit helps, right?
And don’t overextend yourself. Just because you have the chance to pick up new business doesn’t mean you have to. Make sure you know the potential customer’s payment history and how that will impact your cash flow.
If the customer traditionally pays late, it doesn’t mean the business isn’t worth grabbing. That’s where factoring with a company like Triumph can play a role. Factoring is where you sell the bill to a company that gives you cash upfront for a discount – you get a percentage of the total bill and the factoring company gets a small percentage for taking the risk on collecting the debt. But the cash influx can be critical to maintaining a positive cash flow.
If you are not interested in factoring, be diligent about chasing down your past-due receivables. Include strong late-payment penalties and collections policies, Sederholt suggests.
“Create an internal time line of procedures for when you’ll send the initial invoice, when payment reminders will go out and when you’ll make collections phone calls or cut off services if past invoices aren’t paid,” he writes. “Some companies have even benefited from incentivizing customers through discounts for early payments.”
Cash flow management is more than just paying your bills on time. It is designing a program of managing money to ensure your business remains fully capitalized at all times – and in those times when it is not, already have a plan in place to address shortfalls.
In short, a successful business depends on how you manage your cash.