How to Create Strong Business Cash Flow
Sharon: Good morning, everyone. This is Sharon Heller, and I'm here today with Steven Kohnke. Good morning, Steven.
Steven: Good morning, Sharon. How are you today?
Sharon: I'm good. I am looking forward to our discussion this morning and hearing what the experts from Denver Business Coach have to share. So what's our topic today?
Steven: Yeah, as we've been talking about, Denver Business Coach did some qualitative research recently and just quoted business owners in the area of where their strengths and where the weaknesses are. Just for us to understand, where are the critical points, what are business owners experiencing.
Steven: And the topic today is really going to be around cash flow. Do you currently have a strong, positive cash flow in your business? And the response here was actually one of our lower responses. On a scale of 1 through 5, it finished up at 2.9, subducting on the lower end. So I want to make sure to address this thoroughly today.
Sharon: Interesting. It sounds like an important topic. So what sort of cash flow are we talking about here?
Steven: Yeah. So in any business, there is a bunch of different types of cash flow. There's even the statements, the cash flow statement for the entire business itself. If you're thinking about it from an obvious standpoint, it's how much money is coming in, how much money is heading to your bank account, how much money is leaving your bank account, and that's the flow of cash through your business.
Steven: Today, I want to specifically talk about cash flow from project to project basis, and that impacts the overall cash flow of the business. So starting off a little bit smaller and then seeing the bigger picture.
Sharon: Awesome. And do you have, like a specific example that you can share that will help us really understand what it is you're talking about?
Steven: Yeah, absolutely. So on a project basis, mostly service-based companies will be servicing projects. They don't have a product that they are selling where someone buys a TV, for instance, an exchange of cash is there. On a project, it's usually ongoing or has a start time and a finish time.
Steven: So I want to use the example today of a landscaping company of, say, a homeowner comes to your business as a landscaping company and says, I want to redo my backyard oasis, I want to make it really nice. So I like to hang out there and with everyone staying home right now, that's an important piece that we want to enjoy the space that we have.
Steven: So as that homeowner asking you to do this, you have to design the project. You have to understand what's going on. And let's say the homeowner wants a good grassy area, they want a raised garden bed to be planting all their vegetables in, and they want to firepit to hang out. It's around at night with their friends and let's say they want to rock waterfalls just thrown in there somewhere.
Steven: And so your job is to design it. And after looking at all the materials and labor, this isn't a small project. So you're going to need other people around to help you with this. So there's Payroll that's involved here. You have the choice as the business owner to collect that money upfront during the duration of the project, on the ends, or any variation between those.
Steven: Let's say the project costs twenty thousand dollars. Do you want to collect ten thousand upfront? Do you want to collect just the cost of materials? Do you want to do all of it upfront? Best practices say, collect 75% percent to 100% of the total project before it starts. This way, you have the cash in your business and your business isn't required or having to hold the burden of financing that product or project for you to deliver, the customer is, they are financing that.
Steven: This is good because you don't have to figure out how to make payroll. You don't have to figure out how to buy the materials in order to execute the project. So you just have more than cash in your business to actually deliver what you're doing. If you have the cash, it's less stressful than if you're trying to figure out how to buy the materials that you actually need in order to deliver this project.
Steven: Many business owners that I know, in this situation, will sometimes say "I'll do the cost of materials and then we can settle up on labor and the act", which is better than collecting everything at the end of it. But if you've committed a certain amount of money, it's better to collect 75% to 100% on that project by project basis up from.
Sharon: Great to know. Yeah, no, I can see how that would make a tremendous difference. Anything you want to add?
Steven: Yeah, well, of course at Denver Business Coach this is a common problem that we do see with the businesses that we work with is, when do we collect it? A lot of business owners might shy away from collecting that much upfront before something is delivered. We kind of help them overcome that fear and put their business in a more sustainable growth way by implementing those different types of policies within business. Many business owners have questions about what is the best way to go about doing something like that. Just visit us at DenverBusinessCoach.com and we'd be happy to have that conversation.
Sharon: Great. Thank you, Steven. Terrific talking to you today.
Thank you, Sharon.