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Carol Roth

January 18, 2016 by Speakers' Spotlight

Why Your Business Needs Cash-Flow Yoga

An authoritative voice in business and news media and an on-air contributor for CNBC, Carol Roth is a highly sought after panel moderator and emcee who always ensures that “business is never boring”, making her a time and time again favourite with all audiences. In this recent column for Entrepreneur magazine, Carol describes her approach to the seemingly never-ending “cash crunch” new businesses can find themselves in:

Cash flow management is one of the trickiest aspects of running any business but especially a small business. An entrepreneur whose income statement shows strong profitability can still find himself in a cash crunch.

The culprit? Cash flow.

Cash flow is a challenging concept for many to understand. I describe it as the actual movement of dollars in your business — where money is coming into your business from and where it’s ultimately going to.

And the way to master it is through a phrase I have coined called “cash flow yoga.”

Understanding cash flow yoga

Quite like the breathing pattern in actual yoga, in performing cash flow yoga, you want to take cash in quickly and let it out very slowly.

Say it aloud with hand gestures — cash in quickly, cash out slowly ….

Here’s the basic practical premise. For cash in quickly, you want customers to pay you as fast as possible. For cash out slowly, you want to take as long as possible to pay your vendors, suppliers and service providers. When you have mastered this, you have mastered cash flow.

Here’s why this is so important. Let’s say that you sell $10,000 worth of consulting services in May, but your client doesn’t pay you until June, and you have to pay your electricity, salaries and other overhead of $4,000 in May. On your income statement, you will have a $6,000 profit — $10,000 in consulting revenue minus $4,000 in overhead expenses. But, that profit is only on paper and really, the only paper that pays you is physical dollars.

So. if you have to pay $4,000 worth of overhead expenses in May and your client doesn’t pay you until June, you have to find $4,000 from somewhere. That’s the cash flow issue: in our example for May, you are profitable on your income statements, but your cash flow is negative, which may mean no dollars going into your pocket or worse, dollars coming out of your pocket to pay for expenses.

Mastering cash flow yoga

To balance between when you get paid from customers and clients and when you have to pay clients and vendors, lengthen the time it takes to pay and shorten the time it takes to get paid.

  • Get paid as quickly as possible. When possible, get paid in cash and get paid upfront. Even if you take part of your payment upfront as a deposit, that will help with cash flow. Offer incentives, whether a percent off the bill or an up-sell as another incentive for upfront or early payment.
  • Carry less inventory. Try selling items before you build them — think of how Kickstarter offerings are structured — or make build-to-order part of your selling proposition. Too many businesses invest in products and services and then try to test the market for them. This requires a big capital investment and then possibly even inventory. If your production cycle is short enough, sell the product or service first, then create it. You can also take a down payment or even offer a discount for an upfront payment to increase your upfront cash.

See if your vendors will ship direct to customers as well for more of a just-in-time inventory management system.

  • Negotiate with vendors. Vendors can help you through a cash crunch by extending you better terms or even by investing in you in some way (such as in the form of a loan). If you are an important customer to them, they benefit by you having a healthy business, and if you can give them an extra return on their capital, that’s a win-win for everyone.
  • Cut back on and stretch expenses. Sometimes, capital can be found by just simply cutting out expenses or changing to lower-cost providers. Change your phone to a cloud-based provider or move your big software purchase to a software subscription where you are paying a smaller amount monthly instead. See what other expenses are not necessary — or can be stretched out — and be your own source of funding.
  • Use your credit card cleverly. Wait until your invoice terms are due, then use your credit card to pay if your vendor will let you. This will give you another billing cycle to extend your need to output cash.
  • Raise some cash in an unusual way. Another great way to get a cash infusion is by selling gift cards or certificates. You may want to offer a discount as a way to tempt your customers into buying now and buying more. Just make sure to look into local laws and remember, it’s a liability — you still need to fulfill the obligation, but it’s a great way to get a cash infusion.

If you commit to practicing cash flow yoga on an ongoing basis, you will improve your overall business health and flexibility and not end up as the business equivalent of a downward facing dog.

Carol Roth/Entrepreneur/January, 2016