Cash-Eating Gremlin Hunting

Posted: July 19, 2010 in Business Help, Business Management, Cash Management, Entrepreneurship, Uncategorized

Sometimes the thing that will save your business is simply effective management of cash, even when you aren’t really making any money.

A Case History

Recently a new client of mine was reviewing suggestions for increased marketing efforts and exclaimed “My phones are ringing! I have tons of business, more ongoing projects than I normally do!”. After a moment’s reflection I told him that we needed to really look at that block of business then, because no matter how many projects he had, he wasn’t covering his expenses every month. After the phone call had finished I took some time to reflect on that outburst and contemplate all the different reasons why this client’s “projects” weren’t adding up to a positive figure at the bottom of his cash flow statement. This was going to be fun.

Cash, not Profits

It is certainly true that while the basic goal of any commercial business is to turn a profit, a more basic goal these days must be survival. The oft-used phrase “Cash is King” is more pertinent now than ever.  As I thought about my client’s problems I determined that we needed to look closely at his aged payables statement, and look closely at the balance sheet for each job he was working to find what gremlins were eating the life’s blood of the company. If your business has the same ailments then making a list of where to find cash-eaters will be helpful as well. My initial investigatory list looked like this:

  • Analyze aged receivables
  • Analyze payables for discounts taken or missed
  • Prioritize payables
  • Evaluate pricing matrix, and compare to actual results
  • Evaluate detailed profit and loss statement
  • Evaluate 10 sample projects’ income/expense records and compare to businessplan model.
  • Develop deviation tables to determine projected vs. actual income/expense/profit results
  • Evaluate employee productivity
  • Islolate the gremlins and kill them.


Let’s Look at the Logic

Let’s take a quick look at each of these so that I can at least provide my logic behind these items.

(1) Analyze Aged Receivables: Find out who is paying the slowest, and if they are outside of the terms of their billing agreement. Extremely slow pays must be cut off, or aggressively collected no matter how big a client they are. If they value the relationship then they will increase the pace of payments. If people don’t pay it really doesnt matter how much business they do with your firm, because they eat YOUR capital while protecting their own. Doing these things will result in expense reductions too. The flip side of this is that the clients that pay the fastest should be moved to the top of the production list. If they pay fast, finish their work fast and money flow will increase. If you have a client that you are determined to keep that has a slow pay history, then it is time for a serious “come to Jesus” discussion with their accounting department or higher. Remember, it is the life of your business you are concerned with.

(2) Analyze payables for discounts. Take discounts where you can.

(3) Prioritize payables: if income is less than outgo, then you have to prioritize payables and expenses. Slash costs everywhere you can. For an entrepreneur this is akin to accepting defeat. That is completely narcissistic. Be a General instead, and remember that survival is equal to victory in tough times.

(4) Evaluate pricing matrix: compare to actual results. Check your prices and determine if you are charging all you can for everything you sell. Then look at how you are actually billing clients. Cut out the “buddy deals”. You cannot afford them.

(5) Evaluate profit and loss statement. Cut unnecessary employees or reduce hours. If you have done a good job on 1-4 above, you will find that this is probably an easy thing to do now.  Find waste every place you can and eliminate it. Lean times call for lean operations.

(6) Evaluate 10 sample projects: Look at 10 of the most recent projects that you have completed. If you do a good job of accounting for costs on a job by job basis this can be accomplished by a few keystrokes in Quickbooks. If you don’t, then shame on you and fix this problem immediately. Every project you do should be accounted for as if it were a mini-business inside your business. When you set prices, you had a model in mind as to how much each thing you sell costs you, and a desired profit margin. Review these projects to see how things shape up in the real world and then make pricing and cost adjustments.

(7) Develop deviation tables to display actual vs. projected data on the 10 projects reviewed. A graph of actual vs. projected on income, expense, and profits will show you how far off you are.

(8) Evaluate employee productivity. This is usually pretty painful, but you have to know who is producing and who is not. If you can consolidate jobs, then do it. Slackers have to go. They will drain the life from your business. Morale will improve if you toss someone who obviously isn’t carrying their weight.

(9) Isolate the Gremlins: Find the problems and stamp them out immediately.

The survival of your business is at stake. An orderly method to discover and solve your problems always helps.

Happy Gremlin Hunting.


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