If you're running a small business, especially one that is growing, then chances are you are broke all the time.
The cash float problem that occurs during business growth is a mathematical rational reality that is easy to understand, but still punches you in the gut from time to time.
Simply put, if you are in a position—as most of us are—where you must pay to create something before you sell it, and your customer pays you 45 days later or so, then you have a period of time of at least 45 days (usually more) where you have spent money that you aren’t getting back. This is called 'float'. If your business is in a steady state, that float will be equal to two or three months of income. For example, if your company makes $240,000 each year, the float is probably $40,000 to $60,000.
When success comes your way and sales increase to $1.2 million per year, your float also increases from $60,000 to $300,000. Unfortunately, that money has to come from somewhere.
People will tell you that it’s a "nice problem to have." Yet, if it causes you to go bankrupt, then it most certainly is not.
There are many ways to deal with this problem. Factoring, or selling your company’s accounts receivable at a discount, is a popular one. My company, Journyx, used this method in the early days. I hated it. We would invoice a customer, send the invoice to the bank, and receive 80% of the money once they had verified the invoice with the customer.
The bank, however, was reluctant to call customers about invoices below a certain amount, and since we had many invoices that were small, factoring was not very effective for us.
Another way to reduce float is to decrease your A/R number of days to collect number. Michael Dell did this by outsourcing everything, getting money from customers before he built their computers, and paying his vendors notoriously slowly (e.g. 90 days or more).
Dell actually created a negative float, enabling him to grow much faster than his competitors at the time. He couldn't have done it without an online store, a population that was willing to buy direct on the web, and vendors who were willing to be paid very slowly (essentially lending him money interest-free.)
If you work in consulting, you probably can't get away with this. You can, however, automate employee time collection, import the data into QuickBooks and, in the process, get those several hundred thousand dollars worth of paper timesheets off of your floor. This will reduce your float from about three months to two.
Just take care when you implement such a system. If your A/R days to collect number starts to creep up, you could get into trouble fast.
Getting bills out faster is worth a lot of money. If you can reduce your float permanently, it's worth loads.
By Curt Finch, CEO, Journyx
About the Author:
Curt Finch is the CEO of Journyx (http://pr.journyx.com), a provider of Web-based software located in Austin, Texas, that tracks time and project accounting solutions to guide customers to per-person, per-project profitability. Journyx has thousands of customers worldwide and is the first and only company to establish Per Person/Per Project Profitability (P5), a proprietary process that enables customers to gather and analyze information to discover profit opportunities. In 1997, Curt created the world’s first Internet-based timesheet application - the foundation for the current Journyx product offering. Curt is an avid speaker and author, and recently published “All Your Money Won’t Another Minute Buy: Valuing Time as a Business Resource”.