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Last Update: Thursday July 29, 2021

Key Idea: Make Changes Based Upon Numbers

Chris Shatte has increased profits by using financial information to change his purchasing patterns.

Key Question:


Use the numbers generated in your financial statements to make decisions.

Jim is challenging Nani to make changes in her project bid sheet because her profits are too low.

Q: Why does Nani seem to be doing the same thing over and over even though she is not getting the profit margin she really needs to grow her business?

A: Inertia, denial, no need for money? Or it could be some deeper phycological issue like Nani doesn't think she and her husband deserve to make more money. Ron Willingham, author of Integrity Selling, says that many salespeople fail because they think money is something other people are supposed to have. He says often salespeople get to a level of comfort and just stop putting forth effort because they can't see themselves wealthy.

Q: How does a small business owner manage cash flow from operations to his or her advantage?

In addition to the money you put into the business, debt financing and equity financing, there's cash flow from operations. Primarily, this consists of cash receipts from sales, generally the collection of receivables, and cash disbursements related to inventory and other accounts payable purchases and, of course, payroll. Let's look at cash management strategies for each of these:

Cash Receipts from Sales
If you are not in a business where your customers pay cash for goods and/or services received, then you will have accounts receivable. The sooner your customers pay their bills, the better your cash flow. To encourage them to pay promptly:

  • Collect advance deposits on sales if possible.
  • Get your invoices in the mail quickly, preferably delivered with the goods and/or services.
  • Offer a small discount to customers who pay the invoice substantially before it's due. Put this clearly on your invoice, e.g., "2 10, Net 30" means the customer can take a 2% discount if (s)he pays in 10 days, otherwise payment is due in 30 days.
  • Charge interest on amounts not paid on time, i.e., according to the terms of the invoice. Prominently display the interest rate and terms on your invoice.
  • Call each customer on THE day that his or her invoice is past due.
  • Mail monthly statements summarizing outstanding invoices.  Most accounting software packages used today have this capability. Most importantly, minimize your bad debts. Get credit references and do credit checks on all new customers.
  • Monitor your accounts receivable aging daily and stop shipping or serving problem accounts until collection issues are resolved.

Inventory Purchases and Other Accounts Payable Items
Here, our strategy shifts. While we do everything we can to accelerate the flow of cash into our businesses, once it is there, we do all we can to hold onto it as long as possible. Don't cross the line of affecting your credit rating or vendor relationships, but walk right up to it. Here are some specific things you can do:

Practice JIT inventory control.

  • JIT stands for "just in time". Order what you need to be available when you need it, but don't stockpile goods. Inventory investments tie up MOM.
  • Ask your vendors for extended terms. Tell him you are starting a new business and you could build it up faster if you could match your payments to the vendor with your collections from your customers. Take the time to explain your business to your vendor and then ask for terms of 30 days more than your normal collection cycle. In other words, if most of your customers pay in 45 days, then ask for 75 days. Remember, your vendors are like you, they are looking for new quality customers. And who can better sell the idea of your business' promise than you?
  • Deposit your funds locally and then arrange to have them transferred at the end of each day to an out-of-town bank. Write your checks on the out-of-town bank. This usually gains you about three days of "float" where the vendor records your payment before the funds are actually available to him or her. Writing a check without the funds to back it up is against the law and we are certainly not advocating anything illegal but good cash management systems take advantage of the float.


If you are one of those rare small businesses who have started your business with employees, you have special considerations.

Meeting payroll is one of the biggest responsibilities and expenses of most businesses. You do have to pay your people and you certainly have to deposit your payroll taxes on time. Still, there are some cash management opportunities here.

Outside payroll services and staff leasing companies provide a wonderful service to small businesses. In addition to handling all the required filings, they offer the opportunity to procure certain employee benefits, such as workmen's compensation insurance, at reduced rates since you are purchasing as part of a large pool. But these services may be a luxury you cannot afford in the early years. In addition to the cost of the service, because the payroll service company is writing the paychecks for your employees on their account, they'll require that you fund that account several days in advance to ensure the funds are available as they process the payroll. They also draft the payroll taxes from your bank account, including the employer portion of social security, as the payroll as processed.

In fact, you are required to remit payroll taxes, those withheld from your employees and the portion the employer pays, at varying times based on the size of your payroll. The smaller the company, the more the deposit can be delayed. You can research the statutory requirements in your State on the Internet. The point we are making here is there are cash management opportunities in processing your own payroll.

Think about it

Does your business generate enough profit for you to grow? Is there enough profit you to eventually become wealthy? If not, why not? If not, why are you doing it?

What can you do in your business to improve cash flows from operations?

Clip from: Learn to Use Your Financials; Track your Numbers

USA and around the world:  Let us all get our houses in order!  Keeping track of business... it is the job of everyone in a business  The best way  to do it is to read, grasp and act on those monthly financial statements. If you share that information and give everyone bottom line accountability through the key ratios, your business will rally. You'll see an impact immediately!

In this episode you meet three small business owners. Two have gotten control of their financials and one is working to do better.

Unfortunately, most of us do not work closely with our financial data.  We all must.  With all the features built into today's accounting software programs (be sure you have your latest upgrades), any owner should have the numbers they need to run their business with the push of a button.

Texoma Home & Garden

Chris Schatte, Owner

2300 Wilbarger St.
Vernon, TX 76384

Visit our web site:

Office: 940-552-2900

Business Classification:
Lawn & Garden

Year Founded:

Make Changes Based Upon Numbers

JIM: Your gross margin's too low at 25%. You know that.

NANI: Yes.

JIM: There's only two ways to improve it. Number one is be more efficient at the manufacturing part and the second is to increase your prices. Where's the leverage for you? Which one of the two is the direction you need to go?

NANI: In our case, fortunately, we really don't have very much competition so we have raised our prices.

JIM: If you're only making a 25% gross margin you have to raise your prices.

NANI: We created a bid sheet. We put in the estimated cost of labor and estimated cost of materials. We have a formula that we created with our CPA for approximately how much more we need to add to that to cover our overhead and taxes and things like that.

JIM: My guess is that as you do those quotes you generally plug in more than 25% profit.

NANI: Yes.

JIM: But in the end it isn't there so something is wrong in the job costing, right?

NANI: Well, yes it has been.

JIM: The gross margin right now is 25%. What should it be?

NANI: I don't know. I only know that the bottom line sure needs to be a lot higher than it is.

HATTIE: (Voiceover) At Small Business there is self-help study for people who want to start a business and for those who want to grow the business they have. To learn more about this episode choose the overview. You can read every word you're hearing today when you choose the transcript. And, go deeper with the case study. There's streaming video and access to interactive study guides throughout the site.

HATTIE: (In the Studio) Cash is king for us business owners and it's the cash flow projection part of our financial statement that forecasts our cash needs.

JIM: We talked about profitability now we're talking about cash. Someone once said, profits are what you pay taxes on and cash is what you take home. Cash measures what's in your bank account and savings account. And which is more important, what you pay taxes on or what's in your bank account? So we need to track that.

HATTIE: Help us understand the factors that play into the cash flow statement information.

JIM: First there's the profitability of your business which in turn will translate to cash. Are you turning your accounts receivable? Are you turning your inventory? How much are you spending on equipment, furniture and fixtures and what have you and how often do you pay your bills? Your accounts payable? Are you paying on time? A lot of the cash transactions are not on the P & L. For example, if you buy equipment it goes to the balance sheet but it doesn't go to the P & L. When you buy inventory it doesn't go in the P & L, it goes on the balance sheet. It all sucks up cash. The cash flow statement measures what the P & L doesn't which is the inflow and outflow of cash.

HATTIE: How did you project cash flow before and how are you doing it now?

CHRIS: It was a two part system.

HATTIE: It was bulky and maybe you just didn't bother to do it.

CHRIS: We did it, it just took a lot of extra time.

CHRIS: We can take our employees' time and materials and create an invoice directly in the software. This seems like it has made us more efficient and cut out a few steps on the way we did it before. Now with our integrated system our efficiency level has gone way up which has benefited our bottom line, for sure.

JIM: When someone like me goes into a business we'll ask, "I'd like to see your accounts receivable aging -- how quickly are you being paid by your customers-- and then let's go to your accounts payable aging -- how quickly are you paying the folks that you depend upon for their product? Hopefully you generate an accounts receivable aging. This will show you what your receivables are for 1-30 days, what they are from 30 to 60 and 60-90. You get that report and you focus on keeping the percentage of receivables over -- you pick a date -- generally most companies it will be 60 days. One of the first things you ask when someone has a cash flow problem is, how much of your receivables are over 60 days? If they say "I don't know," then you know that the problem is they are not generating the correct reports. If they say my receivables over 60 days are 25% then you know what the problem is. If they say they are 1% that tells you something too. We have to go some place else.

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