Managing Cash Flow
Tips on how to keep a close eye on money coming in and money going out, and taking steps to ensure that the former is always greater than the latter.
by Bruce Hackett
You might work alone, or you might have some employees. If you’re like many painters, you complete a job, get paid, dash to the bank to make a deposit, then pay your employees (if any) and write checks to cover your other business-related expenses.
But do you really have an understanding of how profitable your business is? Are you truly as successful as you want to be? Do you sometimes get nervous at month’s end because your expenses may exceed your income? Do you have the nagging suspicion that you are missing out on potential profits because you’re not particularly savvy at financial management?
If you recognize yourself or your business in this scenario, don’t despair. You’re not alone. Many contractors with a steady stream of business, good work ethics and an excellent reputation are nonetheless woefully inexperienced at knowing how to successfully manage their money.
It doesn’t have to be that way. A brief counseling session or two with a financial advisor will help you learn what you need to know to keep you in the black. Ironically, much of what you need to understand falls under the category of basic common sense.
For people not blessed with an innate talent for mathematics and economics, phrases like “cash flow management” can cause the eyes to glaze over and create undue stress. All it really means, however, is keeping a close eye on money coming in and money going out, and taking steps to ensure that the former is always greater than the latter.
If your business income and expenses remained the same month in and month out, managing your cash flow would be considerably easier. But usually both income and expenses change constantly and the challenge is to anticipate those changes and have enough cash available for any eventuality.
“The importance of managing your cash is essentially to conserve it,” said Shirley Cheramy, a certified public accountant in Atlanta, GA. “You want to maximize the cash you have available in the bank. You don’t want to pay it out any sooner than you have to, and you want to collect it as fast as you can. A business has financial obligations — expenses — it must fulfill, so it’s critical that the cash coming in from customers and clients paying for goods and services be sufficient to cover those expenses and beyond.”
This is true for businesses of all types and sizes, but it’s particularly important for small businesses, who are typically harder pressed to absorb losses or cope with delays in payment.
‘“Prompt collection of accounts receivable is essential,” according to Small Business Advisor Chellie Campbell. “To ensure against slow payment or non-payment, entrepreneurs should establish clear guidelines for payment. They need to say to customers, ‘This is our fee, this is the time we’ll provide service, this is when we’ll bill you, and this is when we expect to be paid. Are there any problems with that?’ If you get a signed agreement of these guidelines, your ability to collect payment on time is greatly enhanced.”
Cash flow management is pivotal in the eyes of lenders. And with lenders, whether it be a bank or other financial institution, how you manage your cash flow can be a deciding factor. They will require a record showing your income and expenses which allows them to see how your business is doing, identify potential problems, and get a sense of how businesslike you are, and ultimately help you secure the loan you need.
The space in time between your purchase of supplies or rental of equipment for a job and when you get paid for your services can create problems in cash flow. This can be avoided if you have enough cash reserves on hand to carry you through this period or sufficient credit with suppliers.
Whether you are already established in business or just starting up, your relationship with suppliers can be a big asset in managing your cash flow. Complying with their payment terms most often can cause that your credit limits with them increase as time goes and your business grows.
The expenses of running a painting business extend well beyond the cost of the paint, caulk, brushes and rollers used for specific jobs. You need to purchase or rent ladders, scaffolds, sprayers, generators, drop cloths, cleaners and other equipment you’ll be using over the long term. You need to buy and maintain the vehicle or vehicles you use in your business. You are required to pay for insurance, bonding fees, licenses and association dues. Creating and distributing promotional flyers or advertising costs money, as do stationery and office supplies used for estimates and billing.
If you have a paint shop, you have mortgage or rent payments to make, as well as utilities and phone bills. If you have employees, you are responsible for payroll, the taxes that must be withheld and paid to the government, and contributions to workers’ compensation programs.
Additionally, most financial advisors strongly recommend you create a contingency fund to cover unforeseen costs such as bad debts or interest on any loans you didn’t originally anticipate having to seek.
All of these “overhead” costs must be taken into account when preparing estimates for jobs. Merely making an estimate based on number of hours ‘at the going rate’ and then materials, without including coverage for overhead costs, could cause irreparable damage to the financial performance of your business. Nor will you be able to determine your profit on a job.
Finding out how much you should add to each hour spent on a job for overhead is not a difficult task. Simply make a list of all those costs that are not directly charged to a client. Then try to determine the annual total for each of your overhead costs and divide that amount by 12 to get your monthly costs. You are then ready for the final step: divide the monthly total with the number of hours you expect to work each month and you have the amount of overhead you need to add to your hourly rate.
As an example: If your monthly total overhead is $1,500 and you expect to spend 150 hours on all jobs in a month, then divide 1500 with 150 and you end up with $10.00 an hour just to cover overhead. Say you want to earn $20 per hour for your job; if you then bill your client $30 per hour you have safeguarded that you earn at least $3,000 (150 x $20) and recover $1,500 (150x$10) of your overhead costs. This will guarantee that you always have enough to cover overhead costs.
Because expenses change throughout the year, you need to stay alert to any changes in your ‘monthly sum of overhead expenses’ and adjust your ‘overhead per hour’ figure.
Perhaps you’ve been working on your own for awhile and you feel the time is right to expand. So you hire a few employees for a second painting crew in order to increase profits. That’s great, but it’s crucial not to grow too fast.
“Growth can be a real challenge to manage,” said Campbell. “Basically, it means you to have to spend more in advance in the hope that you’ll get more business — and revenue — and grow. You must have a very specific plotting to be able to do that. Entrepreneurs need to carefully plan long-term investments of their capital funds in order to grow successfully.”
Business bankruptcies are more common than they were decades ago, but why? Experts say it’s more often because of “fatal growing pains” than insufficient sales. “I’ve seen many more businesses fail from poorly planned rapid growth than from lack of customers or sales,” said Hal Schornstein, a commercial banker. “If you’re ready to expand your operations, keep in mind that you’ll need to spend money up front to buy additional equipment and hire additional employees. You must ensure that you have sufficient cash on hand to cover the lag time between when you pay for those things and when the additional revenue will be received. Too often, companies grow too fast by committing substantial dollars up front, but receivables come in much more gradually. Before long, they’re swimming in negative cash flow, and filing for bankruptcy.”
Another key mistake small business owners make is to unwisely use monies that were set aside for those expenses that come due either quarterly or annually, for example, payroll taxes.
“When the time comes to remit those taxes to the government, and the money has been spent elsewhere, they’re in big trouble,” said Philip Light, a tax accountant in Cleveland, OH. “It’s not like being a little late on your credit card payment and having to pay late charges. The penalties for not making your payroll deposits can be very expensive, even extreme. It depends on how nasty the IRS wants to get, how late you are, how much money we’re talking about. I’ve seen some assessments where penalties and interest can be as much as the original tax owed. It’s really important to stay current on government requirements and leave payroll tax dollars untouched.”
If you are currently doing next to nothing of cash flow management, do not get overly concerned. By spending as little as 10 to 15 minutes a day on your record keeping you can get back into the ‘driver’s seat’ when it comes to controlling your cash flow. Consult your tax accountant and get just those guidelines that fit your particular format of business.
Keep track of and record all your expenses and income. With expenses, don’t pay them any sooner than you must, and with incoming revenues, collect them as fast as you can. Be conservative, don’t overextend yourself by spending money you don’t have, and grow slowly. Following these guidelines you will soon find improvements in the overall performance of your business.

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