Does Your Cash Flow Need a Transfusion?

It is time to take the gloves off and talk turkey about the most critical aspect of your business operations.  There is no use sugar coating what in my opinion is your most important asset and the difference between success and failure – 'your cash flow'.  It is the life blood of your business so if you are down a quart you may need a transfusion. Read why

What I mean by taking the gloves off is that the state of your cash flow can spell the difference between a profitable business and bankruptcy.  Why? Because most dealers rely on Floor Plan Financing for the purchase of their unit inventory.  As part of your relationship with the finance company, they will visit your dealership to do a physical floor check of your inventory every 30 to 60 days. 

Let's say you have sold 15 units for a total of $200,000 and after the floor check is completed the Auditor asks you for a cheque for the sold units.  Your cash flow is short and the proceeds from the sale of the 15 units went to pay payroll and payables.  Unless you can rectify the short fall immediately the finance company has no option but to issue a 10 day demand for your financed inventory.  Your inventory is the finance companies security so they literally have no option but to demand.

Don't be fooled that you can just run to the bank and increase your operating line of credit to supplement your cash flow short fall.  Negotiating an operating line of credit or increase typically takes weeks with a bank and you most likely will have to be able to put some "skin on the table" (tangible collateral).  Consequently, if you cannot pay the short fall within 10 days, your inventory will be repossessed, which typically will result in the termination of your manufacturer dealer agreement.  Have I got your attention?  Good!

Of course there are the softer consequences of inadequate cash flow such as delay in payment of your suppliers resulting in COD or hold on release of new orders.  All of these consequences result in your inability to make sales and service your customers.


Business Plan:  The most important step in managing your cash flow is preparing a business plan at the beginning of your fiscal year.  You can easily spin off a cash flow sheet from your financial business plan that will tell you what months your payments (purchases and expenses) will exceed your revenue.  Look for the month with the largest short fall and that will be your cash flow requirement.

Operating Line of Credit:  If you don't have adequate capital surplus to cover the short fall, then negotiate with your bank to establish an increase or new operating line of credit.  As I mention previously, this will take some time and will require a pledge of collateral, however this is the time to negotiate - when you don't need it.

Inventory Purchases:  Where possible, schedule your supplier purchases around the months when you have cash surplus. 

Monitor Your Plan:  As I have said many times before, knowledge is money so monitor your business plan and cash flow monthly to ensure you are on track.  This will allow you time to make critical adjustments to your credit lines or purchasing schedules depending on the flow of cash through your business.

In closing I want to give you a simple example of what a business plan, or budget if you will, can make to your business.  Take two people who earn a fixed salary and are paid every two weeks.  The first guy, Charlie deposits his cheque biweekly and pays his bills according to the due dates but never budgets his monthly expenditures.  The second guy, Chris deposits his cheque, but at the beginning of every month sets out on paper a schedule of his expenses by due date vs. the deposit of his salary.  I guarantee that Chris will have more money at the end of the month than Charlie.  Why? Because by preparing a monthly budget Chris will have planned his revenue and expenses and will have the knowledge of whether he can afford a night out at an expensive restaurant or buy that new golf club.  Chris can make an educated decision where Charlie will just spend.  Chris will never issue an NSF cheque either, where Charlie will because he lost track of his CASH FLOW!

Need help with your business plan? Contact me

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