Chris: Hello and welcome to Thriving in Tough Times, the third in a series of webcasts designed to keep you thriving in spite of the soft economy. Even in the best of times, cash flow can literally make or break a business. Consequently, in a tough economy, it’s one of the first things to suffer. To conquer the cash flow monster, you’ve got to stay on top of your customers and find ways to get the best terms from your suppliers. Some of the keys to mastering cash flow are checking your customer’s credit histories especially those who may have had trouble in the past, offering discounts to those who pay faster, and actually calling customers when they fall behind. It’s much tougher to avoid a phone call than a letter or an email and you’ll know sooner where things stand. To get things started, here are three quick tips on maintaining cash flow from Jim Logan, AllBusiness’ direct response adviser.

Jim Logan: Cash flow is the life blood of any business. So here are three quick tips to help you manage your accounts receivable and get as much money into your business as possible. The first tip is be sure that each invoice you send has a very clearly defined payment due date. If it doesn’t have a clear date, it may not be paid. The second tip is you want to be sure that you have a clear accounts receivable and collection process. What that means is you want to be sure that at 30, 60, 90, or 120 plus days, you’ve had steps built in on how to contact the customer and prompt them for payment. The third tip is really a general one but it’s so important. You need to track everything. If you’re not tracking your ageing, if you’re not tracking write-off, if you don’t have a policy in place, it’s impossible to tell how healthy your business really is.

Chris: Here are some other thoughts on the importance of cash flow and how to manage it, from another AllBusiness adviser, Matt Stevens.

Matt Stevens: If you look at bankruptcy statistics and bankruptcy studies, you’ll find that decreasing cash flow is a leading indicator of bankruptcy so again, it’s something we can’t learn enough about. What are some of the reasons that somebody might be cash short at the end of a project? One of the ways in which you do that is you start off a job on a basis where you don’t bill enough at first and that’s obvious to most of us who have done that but collecting accounts receivables certainly is easy to do. We just got to be better at that but if you look at strictly cash flow kind of the basics here, you’ve got to be sensitive to the fact of how clients pay and you have to get rid of or fire clients that have poor cash flow, poor payment practices. There’s no reason for that unless they’re paying you a lot of money. In cash flow, what you’ll find is a leading indicator or a leading component of return on investment which is something I believe very strongly in. If you’re paid a little bit of money but you don’t have money invested in the job, you certainly have very high ROI. You do that math, it actually is infinity but let’s say that you have a modest amount of profit in a job and you’re paid every 5, 10, 15 days. That return of investment is very high.

Chris: Now let’s look at a specific industry, construction, which can teach us all a few lessons about cash flow. Here’s Matt again as he talks about the importance of meeting payroll and paying suppliers on a weekly basis, a common situation for many businesses.

Matt: In construction, many contractors, if not all contractors really finance a project in some way. They pay their payroll. The job gets billed. They send an application for payment in. It gets paid. They’re given some money back. Somewhere in there is their reimbursement of their expenses but the next week, they have to pay that payroll again, pay those material invoices and so, if you look at that financing or that working capital they’re investing in that project, that’s one of the two calculations you have to make to make return on investment make sense. If you’ve got lots of back log and if you’ve got lots of margin in a back log, you’re good. Well, the business is the second riskiest business in the United States so we have to look harder at this profitability issue, if you say we really want to make sure that we have a very high return on investment of the working capital we lend to projects, now there’s a mildly complex calculation that we go through and it really tells contractors how they’re doing financially on a project and overall in their business.

Chris: Should they be looking at the cash coming in and then the cash going out and when that cash is going out, the timing issues?

Matt: Absolutely. There’s no great change they’re going to make over the short term but over the long term, if they look at this cash in, cash out or what I like to call the cash-to-cash cycle, the industry averages about 47 days if you follow this kind of thing. Now that 47 days, it’s an analysis done by the banks and it’s very accurate. Somewhere less than 50 is a pretty normal cash-to-cash cycle. Well, if you’ve got people telling you that 70 to 80 is normal, I would argue with that. There’s things you need to be doing right now to bring it down at least to 47. The better contractors financially really try to figure out a way to get down to 45 and 40 and 30.

Chris: So that’s the gold standard, so to speak?

Matt: Yeah, the best side of the industry to be observed are the handymen, they walk in one day and they have their hand out when they walk out, they pay me for a day’s work and so their cash-to-cash cycle is zero or one day. And don’t forget when they buy material, that material might be…that invoice might be due in 30 days but they’re still paid today and it goes in 30 so that’s a ridiculous example but you can see the logic in it.

Chris: As credit tightens in an economic downturn, it may seem that borrowing to keep your business afloat isn’t an option. But with the right preparation, it could be. The end result would give you and your customers breathing room to catch up on bills. You can always go to your own bank for such a loan but what are the other alternatives? Katy Ford is a small business adviser.

Katy Ford: There are three places they can go. First, they can go to a small credit union. The reason I recommend this is because usually at a small credit union, you have high level decision makers who are more easily accessible and if you’re good at selling your ideas and you have a solid documented business plan, this might be your best bet. Secondly, you can scan local newspapers and magazines for the financial institutions who are actually advertising for new business. They’re looking for business and so you automatically have what they want. And of course, in this day and age, you can shop the internet. There are several sites out there in the business of matching borrowers with lenders and it’s all for free. Basically the lenders are being paid a fee for the referral. When you have multiple lenders vying for your business, they’re motivated to give you the most favorable terms and lowest interest rates to win you over. And obviously, that’s to your advantage.

Chris: And that’s a wrap for today. Be sure to stay tuned for the next installment of Thriving in Tough Times where we’ll show you how to get the most out of your marketing dollars. I’m Chris Bjorklund, for AllBusiness, thanks for joining us.