More Cash Less Stress: A Business Owner Playbook for Maximizing Cash Flow

When different times in our business life occur, challenges happen, recessions happen, buyer confidence drops, people are a little bit tighter on their money. We get stuck in situations where there's important things we need to focus on. One of the things that usually comes up, or one of the most common questions is, hey, Bob, you're saying I've made $100,000 this year, but where's all the cash? Like, if I made $100,000, why don't I have that in my bank account? We want to make the profits, we want to make them high, and then we want to fix our cash policies and our cash collection and our cash management. But if we don't start with making profits, it's going to be challenging to make sure that we're getting cash. Good day and welcome to the Wealthy Entrepreneur Podcast. I'm your host, Bob Goverow. It's great to have you here with us today. Listen. When different times in our business life occur, challenges happen, recessions happen, buyer confidence drops, people are a little bit tighter on their money. We get stuck in situations where there's important things we need to focus on. And at times like this, when it's challenging, and even if you look at Warren Buffett, right, what does he do in times like this? He makes sure that he is cash heavy. And we need to all do this in our business. It's responsible. And what I usually call is, is increasing our working capital or our safety net. Right. I always look at cash or available cash. So, like lines of credit and whatnot, those are things that are helpful. Should things go a little sideways, if our sales drop a little bit, if our consumer confidence drops, if we have some lost customers because they're maybe closing their business or they're not doing well financially, then we have more reserves to play with. And it's at times where things get a little hairy, like would be maybe the case right now. And in the global economic climate, with all of the political challenges that we're having, you know, globally, to be honest, this is one of those times where we need to focus on cash. So that's what I want to focus on today. But before we get started, I just want to remind you that this is the Wealthy Entrepreneur podcast, the place where we dissect the elements that contribute to entrepreneurial success, from mindset and leadership to profits and revenue and, dare I say, cash flow. And so what I want to actually talk about today is a topic that I think is very, very necessary for all of us. And it's more cash, less stress. A business Owner's playbook for maximizing cash flow. So without further ado, I want to hop right into it today. And what I'm going to do is I'm going to give you, I'm going to give you the biggest challenges that I see related to cash flow in businesses. And then what I'm going to do is give you the top 10 list of things that you can action in your business right now that will put more cash in your pocket. So let's get started and jump right into it. The biggest challenge that I see in times like this or when it relates to cash flow, the number one thing is that people owe you money. And in times like this, what happens is people get a little bit tighter with their money. They're less willing to give it up. So if they were to owe you, they might pay you in, you know, know, more time than what they would maybe have paid before. They might have paid directly. But now that 30 day sort of balance owing turns into 60, 90, 120 days. And it's a really big risk for businesses because if we continue to sell things and we're paying for that service or product to be sold, but we're not collecting the cash very quickly, our cash can go from being positive to negative. So that is the number one challenge is people owing us money. And I'm going to give you solutions on the second half of this. The second one is people wanting to make aggressive debt repayments. So when I think of aggressive debt repayments, this is, you know, the doctor who's coming out of school, this is the person who was taught as a kid, like all of us, likely if you don't have the cash for it, don't spend the money. And so what happens is we have that mindset coming into our business, but sometimes we have to get debt in order to buy assets because we don't have enough cash to do it, or we have some larger investments that we make into things that have debt obligations. And what happens is because we've got this mindset of debt is bad, we aggressively try and repay these debt repayments. So again, the second problem that I would see or the second biggest cash flow challenge I see is overly aggressive debt repayments. And again, I'll share with you solutions to this in the second half. Number three of six, the third one is buying capital assets or any sort of equipment, furniture, fixtures, lease holds, buildings, vehicles, anything that is tangible that you could touch and feel, buying that with cash or from your working capital. Right. Instead of potentially borrowing money. So buying Cash or using your available cash to buy assets that take a time to, to return some of that capital back to you. Number four is shareholders taking money out. You know, I have the opportunity to work with thousands of businesses all across North America and you know, it's a huge thrill for me to be able to connect with these business owners and walk them through a lot of the times their year end or looking at their business financial statements. And one of the things that usually comes up or one of the most common questions is, hey, Bob, you're saying I've made $100,000 this year, but where's all the cash? Like, if I made $100,000, why don't I have that in my bank account? And this is really dealing with all of these six biggest challenges. This is what happens, right? It's one of these six challenges, but one of the most common that I see is that the shareholders are actually taking money out. So yes, they made $100,000, but they also bought a, went on a $50,000 vacation or put a down payment on a new condo or a vacation property, or they bought a new vehicle, or you know, they're renting a cottage for the summer. And they pull that money out of the company because they're like, it's our money. And true, but one of the things that that does when shareholders are drawing money out, especially larger non frequent amounts, it drains the cash resources from the business. So that is one of the biggest challenges. Number five, inventory being purchased with cash. So you think of the car dealer, think of the pool supply company, think of the salon. All of those businesses or business types, they're buying something and they're reselling it. So like the car dealer, for example, they're bringing vehicles in from the manufacturer, they sit on their lot, they sell them, and then they make their money once they sell them, but in the meantime, and the salon owner who brings in their, their hairspray, their different products that they're willing to sell. It costs a lot of cash. And one thing that people don't understand, again, Bob, I made $100,000 this year. Where did it all go? Well, you invested and you doubled down in your inventory, which is not a bad thing. It's just when we use our cash to do it, it's not so great. And lastly, and maybe most importantly, you know, what we need to understand is that cash does not equal profits. So as I've said, you know, Bobby made $100,000. What? Why isn't there a hundred thousand dollars? Well, because you used it for other things. But you know what the main thing is, is that you made the a hundred thousand dollars in profit. Right? We can fix the cash flow challenges along the way. But what if you don't make the profit? What if you're actually losing money? Well, that is a huge driver of negative cash flow. Right? That's our starting point. We want to make the profits, we want to make them high and then we want to fix our cash policies and our cash collection and our cash management. But if we don't start with making profits, it's going to be really challenging to make sure that we're actually getting cash and we can do it. Right? Like we can definitely do it. You might have a loss, but you collect all your receivables. You might have a loss, but you've sold more of your inventory off. You know, that would all turn into positive cash flow even though you've got a loss in your, in your business. But it's not a sustainable long term plan. Terrible profits are the largest driver to, to poor cash flow. If we start with good profits, we can make administrative choices to improve our cash flow. So those are the biggest six challenges. What I want to give you now are the top 10 things that I think you should be focusing on right now to put more cash back in your pocket. Number one, decrease the money that's owned to you. So challenge number one is people aren't paying their bills. The first thing that you can do is get more strategic and more aggressive in how you're collecting your money. You know, a lot of people in a lot of businesses and hey, I've been guilty of this before, you want to do the work, you want to get the invoice out and you're less concerned about collecting the cash because you know people will pay you, you've done a good job, so you're onto the next project. Well, somebody has to be responsible for collecting that money because once it's sitting there as a receivable, it becomes really challenging. Especially in a time like this. Everyone has received what they needed from you and what you need from them is to pay their bill. But they're less likely to do that now that they've got all the benefit. So making sure that we aggressively look at our accounts receivable right now, we come up with a follow up process and a way that we're making sure that we're engaging with our customers. And I don't, I wouldn't want to use the word harassing, but I would want to say consistent follow up so that people are aware that they have that obligation. And you want to essentially get them to the point where they. They don't want to hear from you anymore. They want to get that bill paid. The other thing that I would say that we could do. And a lot of the challenge comes from business owners not being willing to accept all forms of payment. You know, a good example is a lot of businesses don't accept American Express because their fees are high. Except American Express. Accept E transfer, except cash, except checks. Accept any form of payment. PayPal, right stripe any form of payment. So that you're eliminating the roadblocks of getting access to those dollars that are owed to you. Because people will come up with an excuse. Oh, well. Oh, you don't accept amex. Oh, well, I don't have an Amex on me. Okay, wait. No, we do. All right, I guess I'll pay it today. Right. Let's eliminate those roadblocks. Let's make sure that we're accepting all forms of payment. And yes, does Amex charge 4%? Yes, it does. So charge 4% more in your price. Or in many instances, you can actually charge those fees back to your client now where they've changed the register, the regulations. So, you know, that shouldn't be an inhibitor anymore. People can pay that way if they're willing to pay the charges. And you know what? I would say just eat the charges and find a way to increase your pricing to reflect that. Number two, decrease your inventory or items that you have available for sale. So a lot of times we see people who do buy and sell things. You buy something, you've got it sitting around for a while, you know it's decreasing in value. Well, one of the things that you could do is make sure that you're not holding on to inventory longer than you should. Create a sale, you know, put a sale on. Yes, it may discount it, but you know what, you've already paid the cash out for it. What we want is to get some cash back for it. And in many instances, that inventory continues to become more and more obsolete. Why don't we just discount it, get rid of it. You use the cash to bring in something that is more saleable or just have cash back in our bank account. So number two is decrease in inventory or items that you have available. The third one, increase the amounts that you owe. So the exact opposite case of people owe us money and we're not collecting, we need to be a little bit more disciplined in not paying so promptly. Right. What I would say too For a lot of businesses that are working with suppliers or big customers, for them, our intention is to continue to grow our business. So if our intention is to continue to grow, let's have a conversation with our suppliers. One, I would say now's a good time to talk about, you know, price discounts for higher volume work. If we're going to continue to grow, we want a little bit more support from them. That might save us on our costs, increase our profits. But the second part is, hey, supplier, you know, some of our customers are taking a little bit longer to pay. We want to continue to work with you and build our business up right alongside you. So, so would you extend our payment terms during this time? It'll allow you to collect more money from your customers that you're owing and give you a little bit more buffer before you have to start paying your payables. So that will allow you to get a little bit more cash in your pocket. Number four, increasing your taxes payable. So I don't want to advocate this hard, but ultimately we have to make sure that we're filing our taxes, our sales tax, our payroll tax, any of our taxes. We need to be sure that we're filing it on time. But I wouldn't be as eager to give the government all of your operating cash if you're going to need it for something or that you need that cash to make more money. Yes, they will charge you interest, you know, 5 or 6%, depending on where you are. Yes, they will likely charge interest, but, you know, let's come up with a plan on making consistent payments to pay that off over time. Yes, we'll incur some interest, but typically, you know, businesses are buying and selling something or delivering a service where profit margins are somewhere between 20 and maybe 60%. So if we're paying 5% in interest, but we could have reinvested to earn 20 to 60%, isn't that a better play? Same with our accounts payable. Isn't that a better play to save that cash, to reinvest it to make more profits, to increase our volume? That's how we continue to make money in our business, but that's how we continue to optimize our cash flow as well. Number five, get loan financing and access to working capital. So let's stop buying assets. Let's stop buying a vehicle. Actually, here I'll give you a good example. Often I see contractors, I love you, but what happens is in many contractors, and I'm picking on you guys because you guys need vehicles to essentially deliver and this is a common concern that I see happen. And hopefully it's relatable to everybody. But, but contractors, you have a really great year. You make 100, $200,000, excellent. You get to the end of the year, you've got cash in your bank and you go, you know, what we need is another truck. We're going to get another crew. So what we're going to do is we're going to take 70,000 out of our bank account. Out of the 100 we had, we're going to take 70 and we're going to buy a new truck. And when we buy that new truck, the end of the year comes, you get your corporate taxes owing, your HST or your sales tax is owing, and, and all of a sudden you're out of cash. All because you bought this vehicle with operating cash flow instead. You know, the reason that we're buying assets is that we're buying assets so that over a period of time, those assets will generate revenue for us. So for my contractors, you buy a truck, the truck is so that your crew can get to and from jobs over a period of time. They maybe use that truck for three to five years. Well, shouldn't you be making, making those payments over three to five years as well, letting that truck and the crew that's part of it earn the income and then pay the costs associated with the use of that vehicle. What that will do is it'll put 70,000 back in your bank account and now you've got payments that are aligning with while that vehicle is earning income, going to job sites, same thing for equipment, computers, whatever, you know, it is that we need to invest in in our business, let's stop using cash and let's go get access to either loan financing or working capital. So let's talk working capital for one second. Working capital, typically operating line of credit, or you could get a term loan to have a lump sum cash put in. I want to focus specifically on working capital. And the working capital or the line of credit means that yes, you have access to it, but you don't have to pay interest charges unless you use it. And the reason I like this is that it's very cost effective, but it gives us more safety net like I talked about. And so what we typically get that financed on when people owe us money. And when we have inventory, we can go to the bank and say, hey, bank, I've got people owing me money. It's impacting my cash flow. We're going to collect it. It's just Taking a little bit of time. This is just how our business operates. Would you give us an operating line of credit to help support that? And typically, if your business has been in existence for a few years, they will work with you to get up to 50% of your accounts receivable with a line of credit. Now, if you've got all, you know, six year old accounts receivable, that's probably not going to work. It has to be current. But they will likely work with you to come up with some sort of operating line. Same thing goes for inventory. So instead of spending all of your working capital, all the money that you're making to reinvest and build your inventory, let's use the bank's money. Could go work with them on getting an operating line of credit, the operating line of credit they will secure against your inventory. Once again, likely only up to 50%, although I've seen up up to 100%, but 50% funding to buy that inventory. So you're not having to use up all your operating cash to essentially buy those. So yes, it may only be 50%, but isn't putting 50% of $100,000 back in your bank account better than all of it being gone? I would think so. So here's the other thing. With loan financing, now is the time. If your business is doing well and you don't need it, now's the time to structure that type of working capital, reserve operating line of credit, refinancing our loans. You know, let's look at our, our loans that are in existence. Maybe we're accelerating our loan payments. Well, let's stop doing that. Let's pay them over the longest period of time. We keep more cash in our business. More, more cash goes out less frequently. So we accumulate more cash reserves. And some of you may say, yes, Bob, but my interest rate's 6 or 7%. Right. But when you have cash that you can reinvest back into growing your business and earning somewhere between 20 and 50% profits, and you can continue to reinvest and reinvest and reinvest, that's going to be a much higher return than the 6 or 7% interest that you have on a vehicle lease or on an equipment lease. So let's just be conscious of that. Let's be strategic. Yes, we know our profit margins are 35%. If I invest my cash and I get 35% back by investing in inventory or in parts or materials or staffing I need for a job that I make 35% on, isn't that going to be much better than paying 6% to the bank? Absolutely. So let's avoid paying those off so aggressively, especially if we have a use and a need for those cash reserves at the time. Number six, how can we maximize cash flow? Well, you know what, owners can put money back in. So I talked about one of the biggest challenges that owners take money out. Well, owners, we can put money back in. And what I mean by this is first off, don't take it out unless you absolutely need to. One of my biggest suggestions for people is to get on a regular contribution of taking money out of the business. You know, what is your personal allowance so that you're taking just enough to pay the bills and live your life and you're leaving the rest in the business. Right. What this does is it eliminates the excessive spending on the personal side, leaves the cash in the business for making more money. So this is really important. Right. So one of the other things though is if we're doing that and we still need cash in the business. Well, owners, one of the easiest ways to get access to capital, especially in a time like this, where if we need it and it's becoming an emergency, what do we do? We, we look at our homes, we get a home equity line of credit and we borrow against our home, which we can pay off over a long period of time. We put the cash in the business. It helps sustain the short term cash flow needs of the business. And you know what, we can take that cash back out after tax free and we pay it off as soon as we can. Right. So we eliminate the interest on that. So we're not necessarily looking at refinancing the home and pulling all the cash out, paying the interest, but maybe we want to look at just getting that home equity line to increase the flexibility that if we do need those funds, we could get access to them. Right. So again, now's the best time to do that. If business has been good before, it's maybe not so good. Business has been good, equity is good before. Maybe that drops get access to our cash. They won't claw that back. They won't get a new appraisal on your business or on your house after. So let's get access to that now so that we have that, that, that excess amount of working capital and safety net for ourselves. Okay, number seven, we're getting our, we're getting down to 10 here. Number seven is selling assets. So I talked a lot about this during COVID and this is where if business starts to slow down and you know, let's say again, let's use the contractors. I think everyone understands the reference to contractors and their model, right? They're individuals that are skilled and they go to job sites, they need vehicles, they need equipment, they need, you know, fuel, they need insurance, they need all of this stuff, just like many businesses. But I like this, this sort of model. But as maybe the volumes go down, right? So you might be in the business of doing construction projects or landscaping, high end landscaping projects in the summertime and all of a sudden people are being a little bit tighter on their purse strings and you know, it may be reducing the amount of staff that you need in the summer. And so if you're reducing your staff, you're likely reducing the amount of vehicles you need. And maybe you've got one or two vehicles that aren't being used because you've reduced your staff. Let's sell those assets. Let's sell those vehicles. Yes, we might need them in the future. They're only going down in value. Let's sell them now, put the cash back in our business and then if we need them again, we look at financing and paying it off over the longest period of time. But we get rid of those assets now because we're not using them. And why incur the costs? Why incur the depreciation? Let's use that cash to better give ourselves a safety net. Cash sales is number eight. And this again, I talked a little bit about it with the inventory, but if you've got something that is, you know, depreciating, if you've got inventory, let's get rid of it, you know, let's get rid of that. The other part though related to cash sales is, you know, if you're an online business, for example, let's have a discounted sale, right? If we need to collect a bunch of cash in a short period of time, why don't we offer a short term opportunity for people to get in in the short term, right? Especially if you've got the opportunity to do something one to many or, you know, volume of selling something is really valuable to the business. Offer a one time discount. People will likely at times like this be looking for more discounted services so that they can get things a little bit more economically. So super important there. Number nine, increase the deposits on hand. So just quickly, I want to talk to you about the transaction cycle. So typically when a business is selling something, they sell something, they deliver it and they collect the money. Now sometimes they collect the money up front, sometimes they collect the money after the fact. But, but usually there's money collection that happens. And what happens is in businesses, a lot of times we end up delivering, paying for everything, and then collecting the cash after the fact. The idea here is to increase the amount of cash that we, we collect up front and at least move the transaction date forward so that we're collecting when we're delivering, not after the fact. And you think of the dentist office, you don't go in, can get your teeth clean and then pay it a month later. They make you pay when you leave and that's when the service has been delivered. Because the moment you leave, the likelihood of you paying isn't great. You go to the next dentist, you do the same thing over and over. And people do that. So what we want to do is we want to eliminate that risk for you. We want to get you paid as soon as it's being delivered. So super important there. And then even better, get paid before you start, maybe 50%. So that 50% of the price of whatever it is that you're selling or delivering, you get up front, use that 50% to pay for the cost of it, the labor related to it, and then by the time you deliver it and you get paid at the end, the payment at the end is your profits. And then you reinvest that into the next one. And last but not least, decreasing your prepaid items. So what this means insurance, for example, don't pay your insurance when the premium comes due, don't pay the 12 months, pay it monthly. You know, let's eliminate those bulk membership services or subscriptions that we pay annually upfront. Let's defer those over a 12 month period. It will keep all of the cash back in our business and we will pay for the use of that subscription, membership or whatever as we're using it and generating income. So those are my top 10 lists on how to maximize income or how to. Sorry, how to maximize cash into your business. Identify the greatest problems that we have in our business. Hopefully this has been super valuable. Guys, this is the Wealthy Entrepreneur podcast. And, and we are talking about more cash and less stress. Definitely important in times like this where we're having economic challenges and political conflict around the world. If you found this valuable, make sure you drop us a comment, drop any questions, happy to answer, or address any of those. If you feel like it's been valuable and you think someone would benefit from hearing this information, please share. We're on a mission to empower entrepreneurs and help support them with the confidence of making informed decisions. So that we can change the world in a positive way together, and we can celebrate that success as a beautiful entrepreneurial community. Also, make sure you give us a Follow, give us a Like, I would love for us to be able to share with you the next set of information or experience or case study that we have, or interview with a successful business owner who typically they share some of the things that didn't work, some of the things that have worked to help make them who they are today. We can all continue to learn from those. So once again, this is the Wealthy Entrepreneur Podcast. I'm your host, Bob Govreau. Thank you so much for joining me today, and I look forward to seeing you again. Next time.