Ruth King
Contributing Writer
Profitability Revolution Paradigm

These six cash flow mistakes can kill your business:

1. You think you can lose money on maintenance and make it up on service or replacement.

If you have 1,000 maintenance agreements and you lose $10 on each one that is a $10,000 loss.  Assuming that you normally earn 8{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} net operating profit you have to generate $10,000/.08 or $125,000 in revenue to make up for it.  Can you? Maintenance agreement pricing should be at least break even.

2. You don’t have proper cash handling procedures in place.

Put the proper procedures in place so that you keep the honest people honest and don’t tempt them. Procedures will never keep the embezzler at bay.  He or she will find a way around the procedures.  However, focus on the 99{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} of the population who is honest.  Put, at a minimum, these procedures in place:

• bookkeeper does not sign checks

• owners or senior managers are the only ones who can add a vendor to your software program

• person who opens the mail does not make bank deposits

• send bank statements home.

3. Your CPA tells you to spend cash in December.

You are having a great year.  Your tax bill is higher than you want to it be so your CPA says to spend your cash.  Spend cash right before the slowest quarter of the year for most contractors?  Doesn’t make sense.  I’ve seen many contractors have cash flow and survival issues in the first quarter taking their CPA’s advice to spend money in December.

4. You go to the “Big Boys Toy Store” when you have a great year.

You are having a great year and you want to reward yourself.  Beware of spending too much cash.  (See #3).  It’s ok to reward yourself.  Do it sparingly and make sure you have enough cash to survive slower times!

5. You are not your own bank.

I’ve seen bankers put contractors out of business.  The contractor has a line of credit with a bank and the bank is sold or management changes their loan practices.  The bank calls the line and the contractor has 30 days to pay it back and can’t do it.  The bank takes all the assets pledged to the line and the business is out of business.

Build a maintenance program.  Put at least 50{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} of the cash received from maintenance in a savings account.  Then your pleasant dreams won’t turn into nightmares wondering whether you have enough cash to make payroll this week.

6. Not putting 1{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} of every dollar that comes in the door in a savings account.

This is a corollary to #5 above.  Even if you don’t put all of your maintenance agreement money away, you can still put 1{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} of every dollar you deposit in the bank into a savings account.  Do it starting today.