How To Manage Your Cash Flow

However eager Dave Gallo, COO of Edgewater Technology, might be to lock down new business in this fiercely competitive landscape, he never forgets the basics of solid cash-flow management: ensuring a payment schedule is in place before any job starts. The Wakefield, Mass.-based IT management-consulting solution provider, with $25.1 million in annual sales, makes certain that payment terms are clearly specified in all submitted bids for work.

"It makes collections a priority and instills discipline," Gallo says. "And we're committed to a bid process where jobs are not just accurately priced, but include a cash-flow projection by individual project. This not only gives an idea as to how to set the payment terms, but it educates our project managers about the importance of cash-flow projection."

Like Edgewater, many VARs/solution providers are confronting cash-flow issues head-on, with varying success. In a recent survey, the Chico, Calif.-based Managed Services Provider Alliance found that 64 percent of companies that responded to the survey said they are cash-flow positive, 18 percent said they are breaking even, and 18 percent said they are cash-flow negative. That's a good indicator of this industry's cash-flow smarts. Many of the alliance's 200 member companies are VARs/solution providers.

"For the most part, we're required to invest cash before realizing the...profit from the sale," says Tom Williams, CFO and executive vice president of Indus International, an Atlanta-based service-delivery-management solution provider. "A poor understanding of the timing of cash flows can make a huge difference in how financial performance is viewed. This could ultimately affect market capitalization, leading to poor stock currency for raising capital and/or pursuing acquisitions."

Effective forecasting is key, Williams and other solution-provider executives say--thorough research, anticipation of bumps down the road, a realistic view of obtainable sales targets and sound planning are all necessary for success.

"Customers may reconsider buying decisions or future investments if they're concerned about a company's viability," Williams says. "A company's ability to recruit, retain and reward valuable employees may be impaired with poor cash flow. The inability to pay vendors on time will likely create a decline in vendor relations and willingness to partner...This is usually a formula for failure."

Questions To Ask

Many VARs mistakenly assume that if the profit margin on a sale is high, then the cash-flow picture will work itself out.

But VARs need to ask themselves a number of questions, says Jim Teter, president of Avnet Enterprise Solutions, a Tempe, Ariz.-based enterprise/embedded technology reseller, such as, Do you have the credit line to actually get the order entered on your distributor or supplier? Will you have to pledge company assets to collateralize the credit line? How long will all this take to get in place? Does it put the order in jeopardy? After the order is placed, what are the payment terms? Can you collect the money from the end user rapidly enough to pay on time? How do you balance paying bills and paying employees?

Many cash-flow problems start when smaller solution providers become successful--and grow larger. Case in point: Red Square Systems, a Pittsburgh-based consulting and services solution provider, found itself in rising demand. Invoices started going out 30 days after the work was completed, with some clients even pointing out to Red Square's execs that they hadn't been billed at all after five months. The company finally invested in Autotask IT Services Management software from Rensselaer, N.Y.-based Autotask to better manage contracts, billing and other sales/customer matters in automated, Web-based fashion.

"When it comes to running...any business...bad cash flow is really just a symptom as opposed to the problem," says Ian James, president of Red Square. "A lot of solution providers are...really good at providing top-quality IT services, but don't do as good a job in running [their] own businesses. As [they] get bigger, better and more successful, it gets harder to actually make a profit...because [they] never bother to put into place the right business systems. [They] can't account for what projects are completed and what's billable. [They] become victims of [their] own success."

As Red Square discovered, it isn't unusual for customers to remind VARs that they haven't been billed for months after the completion of the job.

"You need a disciplined accounts-receivable collection process," says Paul Shain, president of Berbee Information Networks, a Madison, Wis.-based networking/midrange server-environment solution provider. "You need to get the sales teams out of accounts-receivable collection. You need to make this a dedicated position."

Of course, it's not always the VAR's fault. In many cases, it's the customer causing the cash-log jam.

"Customers often want extended terms on the front end and take even more extended terms on the back end," concedes Jeff Kane, CFO of Optimus Solutions, a Norcross, Ga.-based IT consulting services provider. "If this customer is a recurring one, seldom does invoice collection take priority over the customer relationship."

In Cash-Flow Hell? Find the Path To Salvation

PROBLEM: Your record-keeping/fiscal administration are a mess. Invoices are sent late, then routinely get rejected because they're incomplete. And your own customers have to remind you to bill them.
SOLUTION: Get an audited financial statement to point out areas that need improvement. Cash-flow management is pretty basic stuff, says Paul Shain, president of Madison, Wis.-based Berbee Information Networks. "Unfortunately, most VARs spend most of their time worrying about the income-statement side of their business and not the balance sheet," he says. "Understand the balance sheet, and you will understand the true cost of doing business, and, thus, price appropriately."

PROBLEM: You're getting plenty of work, but have little cash to show for it.
SOLUTION: Sound business practices are about more than simply having lots of work. You can get all the jobs out there and run your people ragged, but still end up losing money. Consider carefully as to whether a potential job will pay off down the road. Make sure your bids accurately reflect the needed materials, logistics, technology and human resources needed to meet the customer's needs. Include clear payment terms that won't leave your company in the hole long after the work is finished.

PROBLEM: You spend more time in civil court than in the office.
SOLUTION: Sure, some lawsuits are the other guy's fault. And one could be a fluke. But two or three, in the same legal area, that's when it's time to take a serious look at the problems. That's when it's time to consider you could be to blame.

PROBLEM: Exterior stuff, like health coverage, HR and retirement plans, are weighing down the bottom line.
SOLUTION: Consider outsourcing it. Practically any function can be given to a contractor. For example, to save on cash flow, Wakefield, Mass.-based VAR Edgewater Technologies was happy to farm out these needed services to a contractor who, in exchange, took an ownership stake in the company.

PROBLEM: Employees are leaving in droves.
SOLUTION: If you start seeing more than 20 percent in annual turnover, find out why. If exit interviews are indicating that salary/bonus freezes and benefit cutbacks are a dominating theme, you may need to recognize that this is a cash-flow problem and not standard, disgruntled-employee griping. Make a game plan—based upon best practices discussed here and others from credentialed consulting resources—to establish enough cash flow to sustain a year's worth of operations.

Dennis McCafferty ([email protected]) is a freelance writer based in Herndon, Va.