Entrepreneurs: Cash for Growth and Where to Find It
When 6- and 7-figure entrepreneurs want to get to the next level in their businesses, I’m the CFO they call. I help them get there by focusing on cash flow. We make sure that owners leverage their cash flow, so they can become more profitable, pay down their debt, and grow faster.
One of the reasons clients come to me is because they feel like they’re making money in their businesses, but they have no cash to show for it when they look at their bank accounts.
They’ve been profitable; they’ve had a good year, but their bank balance at the end of the year doesn’t seem to agree.
There are a number of things driving this disconnect that can be fixed; and without understanding, it leads business owners to uncertainty, lack of clarity, and very often working harder than they really need to because they’re stressed about finances and waiting for the other shoe to drop.
Living like that, without that visibility into where their cash is coming from and going is a huge stressor that has so many implications, not just on the business, but the personal lives of owners as well.
One of the ways to combat this disconnect between profitability and bank balances is to dig into a couple of places that affect the timing in your cash flow.
The best and quickest place to focus on is Accounts Receivable. Accounts Receivable is simply the cash that is owed to you by customers you have already sold to (converted).
This is one of the key places where that apparent cash leakage is occurring.
Now, there are some very obvious things you have probably already done in this area, but there is a really neat tool that you may not have considered that can get your hands on cash that you may not otherwise have access to.
Let’s take a very specific example.
Many online entrepreneurs have high-ticket sales and payment programs available for their clients. For example, a client can pay $5,000 now or make 2 payments of $3,000 over time. This makes sense because it allows your customers to spread out the impact on their own business cash flows.
The goal here, if you do have a cash crunch problem is simply to accelerate the receipt of that cash that’s sitting out there in Accounts Receivable waiting for your clients to pay you.
If this ‘example business owner’ has 10 customers that owe $3,000 each, that is $30,000 that is sitting out there just waiting to come into the bank account. If the business owner needs a cash infusion, one quick way to see that is to offer the customers who owe money a discount for paying early.
Many think that’s a sign of desperation, but I’ll argue that all growing businesses need cash in order to support that growth, so letting a customer know that you are looking to accelerate your ability to serve customers better, and offering them a discount to pay early to allow you to do that is not embarrassing at all. The key is to market that it benefits both of you.
The simple ask is: I will give x% off of what you owe me if you want to pay it all today.
Now – there is an expense to that (the discount that you give), but we also know that in times of cash crunch and growth, expenses are a little less important than cash-in-hand.
But – there are other options as well! Say that you don’t want to accelerate or change your payment plans for your customers. The well-kept secret is that you can get small business loans against that Accounts Receivable. A bank will see that you have clients that have paid you or are going to pay you and they’ll lend you money. Now – LET ME BE CLEAR – I’m not talking about factoring in your AR or paying exorbitant interest rates. I am talking about loans that good, solid banking institutions will give with relatively low-interest rates – if they can see that you have a solid business model, client flow, and collections history.
I had a 7 figure client that was ready to really scale the business. One of the biggest investments was to add bricks & mortar and the other was to add employees way ahead of the revenue that was going to follow. This is a very common problem once crossing the barriers from 6- to 7-figure revenues and again from 7- to 8-figure revenues.
This particular client owned a coaching business and they had about $350,000 of Accounts Receivable or money that exists in clients still owed her for current services.
We called her bank and told them we had this $350,000 of Accounts Receivables, and that we would like to borrow some money. The bank looked at our financial reports (straight out of QuickBooks) for the last six months, looking at our well-kept list of who owed us what; then nodded, and gave us a $250,000 line of credit line with a fantastic interest rate.
It was the perfect world; the client didn’t have to take any money from that line of credit right away, but it was there when the construction bills required it. And as our cash from Accounts Receivable was collected, the line was paid right back down before much interest accumulated.
So, the lesson here is to not dismiss the value of the money that your customers owe you; it may not be in your bank yet, but there are healthy ways to get use of it!
Author, Virtual CFO, and Finance Coach
"Your First CFO: The Accounting Cure for Small Business Owners" on AMAZON