The integration business can be a fickle place. Factors such as seasonality, dependence on government spending and the way the overall economy can influence spending can present unique challenges for businesses.
With the potential for such volatility, commercial integrators are faced with cash flow issues. Most CIs have accounting departments, but cash flow is a different animal. Cash flow is unique because an organization can be generating strong profits but have no money.
Unlike profitability, which is simply accounted for by revenue less cost of doing business, cash flow is dependent on the actual collection of receivables generated from the work that is being performed.
Therefore, you can be showing a profit because you have invoiced for work being done, but you may not see the cash immediately. In fact, in this business it isn’t uncommon for receivables to linger for 30, 60 or even more than 90 days.
It can be detrimental to your business when large chunks of receivables start aging. It can cost you interest, relationships with suppliers and problems with customers.
And while the only genuine way to create more working capital is to continuously generate profit and keep the cash in the business, there are ways for businesses to be more strategic with cash flow:
Receivables Management. Most of our customers have a plethora of bills to pay. Many integrators don’t have stringent policies for staying on top of receivables by sending reminders, making calls when they come due and building relationships with customer payable teams. If you aren’t calling and asking for payment, the customer may be thinking you don’t need the money that badly.
Down Payments. At some point it seemed that asking for down payments became taboo. Salespeople often feel that it is a potential sticking point in getting the deal. The problem is that our projects can take months, and while progress billing can alleviate some of the strain, it still doesn’t account for the fact that most vendors want payment in 30 days. A substantial down payment that covers a good component of the “cost” of the equipment can allow for better management of cash flow throughout the job.
Credit Worthiness. There are so many tools for understanding customer credit worthiness. A lot of companies want or need the business so bad that they will overlook bad credit or not even check it. Make sure at the very least you know what you are getting into by using tools like Dun & Bradstreet Credibility to determine what type of pay to expect from a customer. Sometimes the best business deals you do are the ones you don’t.
Credits, Rebates & Co-Op. In this business there are a lot of opportunities to earn credits, rebates and marketing dollars from vendors. Collecting, however, isn’t always easy. Just like receivables management, this needs to be managed so you don’t end up with tens or hundreds of thousands in rebates that aren’t claimed.
Borrow When You Don’t Need It. I know it sounds funny, but this is more of a statement of preparation for growing businesses. I often hear business owners saying, “I’m all cash-based and I don’t need any credit.” I think that is wonderful, and I hope that you can sustain that forever. But when you are running that way, it is a good time to work with a bank to set up a line of credit. I call this a “just-in-case fund.” There is nothing wrong with running a cash business, but not being prepared is a risk you should not and do not have to take.
In the business we are in, cash flow can be the difference of success and failure. The focus on it should be as high as it is on sales and marketing. Without cash, all the sales in the world mean nothing.
Daniel L. Newman currently serves as CEO of EOS, a new company focused on offering cloud-based management solutions for IT and A/V integrators. He has spent his entire career in various integration industry roles. Most recently, Newman was CEO of United Visual where he led all day to day operations for the 60-plus-year-old integrator.
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