Feb 23, 2020 | By: Daniel Honan, Bookkeeping For Painters
Does your business struggle to maintain enough cash in the bank to pay vendors, employees, and bills on a regular basis? If so, you are not alone. According to a study by US Bank, 82% of small businesses fail due to poor cash flow. Managing your cash is crucial to staying in business, and more importantly, making money.
Like the saying goes “Revenue is vanity. Profit is sanity. Cash is reality”. Your business might be profitable on your Profit and Loss and have hundreds of thousands in sales, but yet still struggle to pay its expenses. What can you do about this? Below are 3 strategies you can employ in your painting business to improve your cash flow situation.
1. Set-up separate bank accounts for your business.
If you’re like 95% of business owners, you look at your bank account to determine whether you can afford to purchase something for your business. This method often leads to overspending and running into cash flow issues. One way to give yourself a better idea of what you have to spend is to set-up several different bank accounts for specific purposes. This way, you can get a better idea of what money you actually have available to spend at a quick glance.
In Mike Michalowicz’s book Profit First, Mike recommends creating 5 separate bank accounts; a bank account each for incoming revenue from customers, operating expenses (payroll, overhead costs, materials), taxes, owner salary, and owner business profit. Once the 5 bank accounts are established, Mike recommends to periodically allocate the money you deposited from customers in the “revenue bank account” to the other bank accounts based on allocation percentages.
For example, let’s say you determine the following allocation percentages for your business:
You pay yourself a salary of 20% of revenue
You quarterly distribute business profit of 15% to yourself
You save 15% of revenue to pay taxes on earnings
The remaining 50% is allocated to your operating expenses to cover payroll, materials, subcontractors, and overhead costs
Then, on a bi-weekly basis, you would be allocated money from your revenue bank account to the other 4 bank accounts based on the percentages listed above. Now, when you check your bank balance, you’ll see exactly how much you have allocated to operating expenses. This strategy also “protects” your owner's earnings and tax money to ensure you are getting paid what you want from your business.
2. Collect revenue from customers as quickly as possible.
Collecting from your customers as quickly as possible, ensures you have money in the bank to cover expenses. The longer you wait to collect from customers, the higher the likelihood your business will have cash flow issues.
A reasonable approach for residential repaints is to require the customer to provide a 10% to 50% deposit before you start work. How much you require for a deposit often depends on your reputation and selling ability. Another approach is to make it as easy as possible for customers to pay through electronic invoices. Quickbooks Online has invoicing that allows your customers to pay via credit or debit in seconds.
For commercial work, actively track who owes you money. Ensure you have a solid grasp on who owes you and when payments are due to you. Focus your efforts on collecting debt that is the oldest. Have your bookkeeper print you an “aged receivables” report to provide this information.
3. Delay expenses.
Delaying expenses delays the time you have to pay out cash from your business. This is especially important if you finish a job before receiving payment from your customers. If you do not use credit lines, you will have to pay cash to vendors before you receive cash from your clients. This creates a “cash gap”, which is the time interval between when you pay cash out for labor and materials, and when you get paid by customers.
Make sure you set up lines of credit with your material and paint vendors. Vendors like Sherwin Williams and Home Depot charge little to no interest for using their credit lines; especially if you pay the accounts off in 30 days or less.
In addition, negotiate favorable terms with vendors. Getting the vendor to allow you to pay 10 to 20 days later with no fees can have a significant, positive impact on cash flow. When negotiating, emphasize how much business you bring the vendor and highlight your good payment track record.
The bottom line for grappling with your cash flow is understanding where your business is financially. Once you are empowered with the insight, cash flow issues will be a thing of the past.