Defy the Downturn with Five Steps to Stronger Cash Flow

June 11, 2008
By Raymond Joabar Senior Vice President and General manager for American Express OPEN Edited By Bruce Vernyi Editor-in-Chief In a slowing economy, every machine shop has to keep a vigilant eye on the books to keep the business strong. ...

By Raymond Joabar
Senior Vice President and General manager for American Express OPEN

Edited By Bruce Vernyi

In a slowing economy, every machine shop has to keep a vigilant eye on the books to keep the business strong. Some may look to sales figures, profits, or the number of repeat customers for assurance that all is well. But, while these are all important factors, it’s impossible to know where the business really stands without a clear understanding of a shop’s cash flow situation.

Many experienced business owners, however, only learn to care about cash flow the hard way.

In fact, one in four business owners cites cash flow issues as something that “keeps them up at night,” according to the Small Business Monitor, a semi-annual survey of business owners conducted by American Express OPEN.

To avoid the perils of uneven cash flow, there are five steps to measuring, monitoring, and managing the cash that moves in and out of your business.

Know where you stand
First, know exactly where you stand with a cash flow statement.

Poring over an income statement alone won’t shed light on your shop’s cash flow situation. That’s because income statements only reveal sales, expenses, and profits at a given moment. A cash flow statement, however, shows the movement of money in and out of a business over a specific period of time.

A cash flow statement will show not only what cash is left at the end of the month but also the amount that entered and left the business.

In other words, it will make it easy to see whether you’re adding to your business’s reserves over time, or slowly eroding them.

It’s important to see this before reserves get low. Otherwise, a business with strong sales but lagging receivables can find itself in a bind when it comes to covering unexpected expenses or when business slows.

There are some simple balance sheet calculations that can help a business owner understand his or her cash flow situation.

One that can be particularly important for machine shops is a calculation of the number of days it takes to turn inventory.

It’s ideal for many shops to buy materials on an as-needed basis, but many need to keep raw materials on hand for when work comes in. Holding too much for too long, however, can needlessly tie up cash.

If tracking cash flow seems daunting, then take the time to speak with a savvy advisor, a certified public accountant or a financial consultant, because there’s no replacing the knowledge you’ll gain from these basic figures and calculations.

Consider the cost of doing so an important investment in your business.

Go to the source
Understanding how cash flow problems occur is your best defense.

Cash flow problems can arise from either end of the business cycle — spending or receiving — or from both.

Looking at the spending side, consider periods of growth, when your company needs to invest in new equipment or additional labor. It’s necessary to expand to take advantage of good market conditions, but growth expenditures can quickly deplete precious cash reserves. Also consider the basic operational costs that your business must cover through both busy and slow times.

On the other side of the ledger, there must be a steady flow of money coming into the business, or reserves will run dry just from covering basic operational expenses.

Slow periods can erode cash quickly, so it’s important to plan ahead for the unexpected — particularly in a slowing economy.

Keep cash flowing
An ounce of prevention is worth a pound of cure when it comes to cash flow problems, so get serious about minimizing fixed expenses.

A company should only be big enough to cover its most predictable, recurring needs.

Find creative ways of handling peaks in demand without hiring additional staff. Outsource certain jobs when possible, for example, or hire temporary help in busy periods.

When making purchases for your business, look for non-cash ways to get what you need. Creditcard rewards programs can be effective cash substitutes, and bartering with other businesses may be an option.

Of course, many expenses must be paid in cash, and machine shops are generally hit hard by these kinds of expenses, particularly in a time when raw materials and tooling costs seem to rise daily.

One strategy that can even out cash flow is to delay payment to vendors through trade terms. Try to negotiate terms that will allow you to defer payment beyond the typical 30 days and reward you with a discount for paying early.

One way to gain tradelike terms from vendors and eliminate the need to negotiate is the PlumCard, a new financing tool from American Express OPEN that offers small business owners trade-like terms on virtually all purchases. It was designed specifically for machine shops and other small businesses that face high upfront costs and often experience variable cash flow. The PlumCard provides business owners with flexible trade-like terms with the option to defer payment for two months interest-free or receive early pay discounts for just about everything purchased with the Card. You can get more information at

You’ll also need to watch incoming cash.

While orders may continue to come, customers feeling the effects of an economic downturn and may begin to pay more slowly or late. Collect what you’re owed on time by setting clear payment terms and expectations.

Have a fallback plan
Despite the most diligent cash management, there may be times when your company needs extra cash for important investments, such as the latest equipment, so it’s important to be prepared with several sources of financing. It pays to plan ahead because some financial institutions may be more likely to extend loans when your company is in good financial health, and less likely when cash flow problems have already taken their toll.

When seeking financing, be careful not to overlook special lending programs for which your business may qualify, such as those designed to assist small businesses owned by minorities or women.

Manage growth
Consistent growth is the best way to smooth out bumps in cash flow. When growth opportunities arise, plan carefully with an eye on cash flow projections. Make a conscious decision about how much you have to spend to reach your goal and how long it will be before you pay back the debt.

Every investment, whether in materials, labor, or equipment, should have a clear return.

Make sure each will earn a profit, but also look at how long it will take to collect that profit. Likewise, if you look at each customer as an investment with a scheduled return, you’ll not only improve cash flow, but also profitability.

Entrepreneurs go into business because they thrive on the excitement of a good challenge, but even the most daring entrepreneur can do without the stomach-churning, rollercoaster ride of variable cash flow. Rid yourself of these avoidable bad times by keeping an eye on cash flow and enjoy the real benefits of owning a machine shop.

Raymond Joabar is senior vice president and general manager for American Express OPEN, one of the nation’s leading issuers of payment and card products for small business owners.