Seasoned entrepreneurs Lil Roberts, Founder & CEO of Xendoo, and Tom Aronica, Founder & CEO of Biller Genie, know about cash. Both their businesses are in the cash business, fintech and accounting, specifically. So, when they partnered for a webinar recently, we all took note. Here’s how you manage cash flow, according to two startup founders.
Cash Flow & Profitability Are Completely Different Things
A little unknown truth is that most small businesses don’t really know the difference between cash flow and profitability, but they really need to. Understanding business financials, and showing where cash is coming in and where it’s going out, means that cash flow can be managed properly–essential to the failure or success of any business.
So, what is cash flow really about? It’s about collecting money owed to the company providing the product or service. We all know that to keep the lights on, cash on hand is needed to pay the bills. Knowing your cash flow means understanding what’s coming in and what’s going out of the business and managing it, so that the business owner is able to and capable of “staying ahead” of it. For example, you need to know your payroll. You need to understand what your bills actually are, each one. Maybe most importantly, you need to really know your overhead.
Cash flow is completely different from profitability however they compliment eachother. The most profitable business in the world could flounder if it didn’t have money coming in to pay its vendors. Without cash flow, there’s no ability to invest in growth marketing. It’s the inflow of the money and the liquidity of that capital that makes running and growing the business viable. Without cash in your reserve, deals in the pipeline: you can’t invest in growth. So, in other words, having a profitable product really doesn’t have an impact without money coming in. Modeling direct cash flow effectively links operational behavior with liquidity impact, often enabling more informed business decisions.
The Impact of Inventory
One of the biggest factors that influence cash flow is inventory. A vendor might tell a small business owner that they can give them a really great deal (say, 10 percent off), and then the business gets loaded up with inventory. Expectations don’t always match reality, as we all unfortunately have probably experienced. If this happens, the business owner has a real problem. They’ve just laid all of their money on the table and now it’s tied up in inventory. What if the market changes or something unforeseen happens. That leaves that business owner sitting on money that’s not green. In other words, they’ve got a lot of cash tied up in what they sell. Xendoo Online Bookkeeping & Accounting suggests that small business owners really understand how many times you should turn your inventory in a year. Lil Roberts, Xendoo Founder & CEO, is a big proponent that every business with an inventory should do a monthly inventory. It may be painful, but it’s important. If you don’t understand your inventory numbers, then you don’t understand your cost of goods and where money is going and how quick you need to see when you need to liquidate certain types of inventory.
The second biggest factor that influences cash flow is Days Sales Outstanding. It’s an important equation that accounts receivable businesses must keep in their direct sight and figure often. It’s very important for SMBs to know and really understand their DSO. Here’s how that formula works:
DSO equals your Accounts Receivable divided by your total sales multiplied by the number of days outstanding. For example, if you’re averaging $10,000 a day and you’re open 20 days in a month, you’re doing $200,000 a month in revenue. If you’re only Monday to Friday, then your average daily sales is $10,000. Think what happens when you have $300,000 in money owed? You can’t grow your business and you can’t survive. One of the key components to what the Biller Genie platform does is help drive down that DSO number. In order to maintain that cash flow and be successful, you have to know what your cash on hand is and how much you have invested in inventory. Then you can identify how fast you’ll have to turn that inventory. “Really, DSO is our driving component, “ said Tom Aronica, Biller Genie Founder & CEO. “We’re always trying to show that trend line dipping down. If we can reduce the number of days outstanding, we can shorten the accounts receivable cycle—reducing the time between invoice creation and getting paid—something that really stresses out a lot of our customers. We alleviate that.”
Three Steps for Good Accounts Receivable (A/R)
There are three main components to a successful accounts receivable cycle.
Step 1 – Send.
Send the invoice on time. A Wall Street Journal statistic found that, in the United States, there’s an average of six days from the time a small business delivers their product or service until they create the invoice. That’s pretty incredible–and far too long! You’re looking at anywhere from 14 to 30 days between the time of the service that you offered and gave, to the time that you actually get paid. Another staggering statistic comes from a study by US Bank, stating that 82 percent of businesses that fail in the United States, don’t succeed and end up losing their businesses because of cash flow problems—not because of a lack of profitability or a lack of good service. That all relates back to cash flow. This 82 percent of business failures are due to poor cash flow management, or poor understanding of how cash flow contributes to business. Cash flow is critical, because it’s the lifeblood of your business. Without it you can’t buy inventory, pay or hire employees, secure financing, or get a line of credit.
Step 2 – Remind.
The second most important step in the accounts receivable process is reminding. This has to do with the frequency that you’re following up with a paying customer. You probably already know this, but in today’s digital world, people want to get text messages, some people respond better to email, some paper mail. The frequency and format that you’re sending those reminders is the most crucial component and it’s the way that you get your customers to take you seriously. Learn how different types of reminders get you paid. If you’re sending ten invoices in a day, then by Friday you have 50 invoices to follow-up on. That’s difficult, not to mention a pain when it comes to a tough conversation with a good customer. After all, the truth is that most customers want to and intend on paying their invoices, life just happens and sometimes they don’t. Reminders help avoid all of that; and with Biller Genie, payment reminders are automated and stress-free.
Step 3 – Collect.
Step three is collecting on an invoice. It’s not only businesses with inventories that suffer cash flow problems. Service-based businesses are who Biller Genie works with most often. Our system integrates with accounting softwares, like QuickBooks. An example of how big an impact we’ve had on helping businesses with their cash flow came with one of our subscribers, an accountant (someone who really knows the importance of all of the numbers and figures we’ve discussed here).
“We were setting up the accountant on the system. If you can picture it, we had one screen open with QuickBooks and one screen open with Biller Genie, and as we were connecting these systems together, we started sending out messages to her customers. The accountant pulled up an invoice in QuickBooks and she explained to me that she had been trying to get this customer to pay to no avail. She couldn’t even get him on the phone.
Then something really fantastic happened: As she was explaining about this really late invoice that she’d nearly given up on, it went from open to closed right in front of our eyes. That happened just because we were able to provide the customer with an easy way to make that payment. It was a magic Biller Genie moment.”
When it comes to late fees, remember, which bill will likely get paid first: the one with a late fee or the one without?
Seasoned entrepreneurs Lil Roberts, Founder & CEO of Xendoo, and Tom Aronica, Founder & CEO of Biller Genie, know about cash. Both their businesses are in the cash business, fintech and accounting, specifically. So, when they partnered for a webinar recently, we all took note. Watch this recorded webinar to learn how to manage cash flow, according to two startup founders.
Biller Genie works specifically by automating accounts receivable; it will integrate with Xendoo and let businesses access a simpler way to collect, process, and easily reconcile payments in their accounting software. You can also view the webinar presentation.