Sun | Dec 4, 2022
ADVISORY COLUMN: SMALL BUSINESS

Yaneek Page | Bad cash flow will kill your small business

Published:Sunday | September 25, 2022 | 12:08 AM

QUESTION: I want your advice regarding a problem in my business now. We have not been getting paid on time. It started as a minor issue, but has elevated. I have a small transportation company, which mainly goes by contracts. Every now and again I...

QUESTION: I want your advice regarding a problem in my business now. We have not been getting paid on time. It started as a minor issue, but has elevated. I have a small transportation company, which mainly goes by contracts. Every now and again I will also do trips for hire. Settling the invoices with my main contracts on time has always been an issue, but especially since of late it has worsened to the point where some customers owe for six months, four months, and so forth, and where I end up spending my Fridays calling down the people to get my money. Now, I also have to take out a bank overdraft loan. It’s reaching the stage where I can’t even get the money fast enough to pay the overdraft loan. What help can you advise as a permanent solution here?

– Mikey

BUSINESSWISE: Solving your current financial crisis must start with an important mindset change, which is, poor cash flow, particularly for small businesses, is never a “minor issue”. I hope every business owner and independent professional reading this will appreciate that cash-flows are a matter of life or death of the company.

One of the main reasons good businesses fail is because they lacked cash, or the liquidity to meet short-term expenses and other payables. However, when it comes to the transportation business which usually requires substantial upfront spend such as insurance, licensing fees, cleaning and sanitation, gas, the retention of drivers and subcontractors, and toll fees, effective cash-flow management is most critical for survival.

Once you change your philosophy about cash flow management the next step is an urgent overhaul of your company policies and operating procedures, particularly when it comes to contractual arrangements and receivables management. This will ensure that you will minimise the likelihood of cash flow constraints affecting the business in the future.

For example, you may want to consider a policy where an up-front deposit, or prepayment is required before the mobilisation for the start of any work, and that complete full and final payment of the balance is due before completion of the work. Take note of the word mobilisation, which in this case means preparing and organising for the start of the works. Therefore, your new, non-negotiable policy would require a deposit to secure a booking and before you assign any resources such as drivers, motor vehicles, and cash and cash equivalents to the prospective job.

To be clear, ‘full and final payment before completion’ means that you must receive 100 per cent of the balance remaining before the end of a trip, or prior to the end of a contract. My recommendation is that the deposit you require should be no less than the full amount of the total cost to execute the job, including a buffer – also known as a contingency amount, which can range from five per cent to 15 per cent of the total contract amount or more – to cover any unforeseen costs. A job that will cost you $100,000 to execute before profit would require upfront deposit of $105,000 to $115, 000 depending on your buffer, as an example. This way you will never be out of pocket to execute a client’s job.

Bad debt policy

Let us be clear that chasing money owed to you is expensive, and a gross misuse of your time as the leader of the business. At this point you are allowing your business to be used as a banker to your customers, while absorbing all the finance costs. It doesn’t allow for growth, nor positive expansion, and it fosters hostile relations with the company and your clients. In fact, you will always have an adversarial relationship with customers who either don’t want to pay, or refuse to pay on time.

Frankly, these types of customers may be considered ‘bad business’ and when it comes to managing cash flows effectively, sometimes no business is better than bad business. Therefore, you should consider a receivables management policy that clearly defines bad debts. Bad debts are usually any payment not received between 60 and 90 days after becoming due. The policy should also prescribe that all bad debt will be turned over to an independent collector since your small business lacks the capacity to chase money owed.

Contracts and agreements

It would appear from the information provided that your approach to contracts is also problematic, in that it does not sufficiently protect your interests and proactively ensure proper cash flow management. The solutions to this problem include:

- Take a formal business approach to every job, therefore no one should be able to call you and ask that you complete an assignment without an agreement finalised and executed. Informality drives poor cash flow management and bad debts;

- As you price your jobs, and or send estimates to customers, include your payment terms so that they are aware of them and that they are non-negotiable in nature;

- Have a written agreement, signed by both parties to the contract, before doing any work for any individual or organisation;

- Have your own contract template which outlines payment terms consistent with the new policies and operating procedures I described earlier and treatment of bad debts; and

- Ensure that if you sign an agreement that was not prepared by you, it should still have your specific clauses regarding payment, receivables management and treatment of bad debts.

I know that not everyone will be welcoming of your new policies and operating procedures to protect the lifeblood of your company, at the same time not everyone is your ideal client. Your responsibility is always to act in the best interest of the company while doing right by your customer.

Good luck and one love!

Yaneek Page is the programme lead for Market Entry USA, a certified trainer in entrepreneurship, and creator and executive producer of The Innovators and Let’s Make Peace TV series. Email: yaneek.page@gmail.com