Improve Cash Flow to Build a Stronger IT Business

Despite our transition to a credit and electronic payment-based economy, when determining the strength of your business, cash is still king. The effective management of money, particularly the amount of currency you have on hand at critical points in time, is essential to all organizations and their growth plans. Without the proper amount of cash available, it can get dicey when trying to meet your payroll and current expense obligations in a busy month when you have a significant increase in material and labor costs. When business is thriving, that’s typically when overtime and other business expenditures hit a high point as well, but the revenue from those projects takes some time to come in and replenish your bank account.

Not every business is flush with the cash reserves needed to get through the low points in the revenue cycle, so careful planning is needed to ensure the financial stability of the organization.  While it’s important to know how much money you have in the bank today, can you predict what the balance will be three, six, and twelve months from now?

Plan and Track Business Expenditures
Cash flow is more than keeping your checkbook updated, including the checks that haven’t cleared; it involves a combination of tactical and strategic planning. For example, if your business insurance is paid on a quarterly basis, you should have the due dates included in your projections. The same goes for any extraordinary employee charges (such as workers comp), building and vehicle expenditures, taxes, and other operational expenses. Each should be added to a comprehensive plan and updated as process change (especially insurance and taxes, they tend to change the most).

The toughest part when planning your cash needs over time is determining how much capital or credit will be needed to support your sales growth. Operational costs will likely climb if you need to add personnel, vehicles, computers, tools, and office space. A best practice is to start with the target growth projection in the company’s overall business plan. If the goal was a 25-percent increase in revenue, what operational expenses will need to increase to make that happen and at what point in the year will they occur? If you need to hire an additional technician in six months, the cash requirements to meet the increase in payroll would be greater from that point forward; so it must be figured into the plan. The same goes for their transportation (vehicle or mileage expenses), tools, and other business expenses.

The next step is even more difficult, determining how much extra cash will be needed to support the increase in service and product sales. Unless your organization is making major changes to its sales portfolio, additional costs can be estimated from the current sales figures. If revenue is projected to climb $200,000 and the 60 percent of your sales is paid back to suppliers, you’ll need an extra $120,000 to meet your obligations this year. If the growth is expected to be equal all year, determining the additional cash needed would be easy: $120,000/12 months= $10,000 per month. But if you anticipate revenue will be flat in first quarter, followed by a larger increase in the remaining quarters, you won’t need to supplement the bank account considerably in January and February (though it would be good to build up reserves if possible).

Use Credit to Leverage Growth
One of the most important assets your company can maintain is its good credit rating, which allows for borrow for large projects and business expansion. That’s not to suggest running up a substantially amount of debt to fuel your growth, but short-term loans and credit lines can be very useful to supplement your cash reserves when necessary.

Whenever possible, try to avoid making personal investments in your business, even if it’s expected to be short-term. I’ve known several VAR company founders who used their wife’s (or husband’s) credit cards to pay business financial obligations, or to fund their organization’s growth and, in a couple of cases, the exorbitant costs forced them into personal bankruptcy. The lesson to be learned is that risk is inherent in the corporate world, but through proper cash flow management, solution providers can build themselves a safety net.

Learn from the Experts
The best way to hone your cash flow and other financial skills is to spend time with an expert, someone with an understanding of the challenges and opportunities in the IT channel. With the advent of managed services, cloud computing, and other recurring revenue services, it’s particularly important to look at how each factors into your long-term financial planning.

This year’s Breakaway agenda offers an educational session designed to answer many solution providers’ cash flow questions and help them improve their financial situation. Part of the IT business track at the conference, Business Foundations Training: Cash Flow Strategies is intended to focus on the specific financial planning needs of VARs and MSPs. The discussion, led by CompTIA Chief Financial Officer Dave Sommer, will show attendees a number of ways to improve their fiscal situation and make sure they have the reserves to attain their overall business goals. If you’re interested in attending the live training session, just register for this year’s Breakaway conference in Washington, D.C., and make sure to add it to your MyBreakaway online agenda.

Brian Sherman is founder of Tech Success Communications, specializing in editorial content and consulting for the IT channel. His previous roles include chief editor at Business Solutions magazine and industry alliances director with Autotask. Contact Brian at [email protected].