BY KEN LUCCI
Every month my business partner and I analyze dozens of financial statements from chauffeured transportation and motorcoach companies from all over the US as we value them prior to the sale process, assess financial health for owners, or review financial performance of these businesses for banks or buyers. Most companies we review are not flush with cash; in fact, we observe many businesses with low cash liquidity, poor cash flow, and too much debt on their balance sheets. All three of these issues can cause considerable financial stress and if they persist, may cause the business to fail.
Lack of available cash is one of the main reasons why approximately 40 percent of operators went out of business during the pandemic. They simply did not have enough cash to sustain the business until government programs were created to help them weather the crisis. I am sure those business owners wished they practiced the mantra “cash is king” as a basic business principle.
The phrase “cash is king” emphasizes how important cash reserves are to remain flexible, exercise opportunities, and survive disruption. This idiom became popular in the 1980s when companies with substantial cash reserves had the advantage, particularly in mergers, acquisitions, and market expansion. They could make strategic acquisitions faster, invest in growth, and most importantly, manage economic downturns. Healthy cash liquidity provided them with flexibility and stability when competitors and acquisition targets were failing due to lack of capital.
As we reach the end of 2024, there are significant economic concerns based on world events such as wars in Ukraine and Gaza, the recent US election, and a heightened concern of lone wolf attacks inspired by the forementioned situations. In uncertain times, it is wise to focus on improving the cash position of your business.
Signs Your Business Has a Lack of Adequate Liquidity and Poor Cash Flow
- Spending more than prior periods, especially when income has decreased
- Consistently late paying vendors or having to hold checks that will not cash
- Struggling to make payroll frequently and hold off paying vendors
- Having to tap into personal credit cards or personal savings
- Consistently use credit lines or carry high balances because you have no cash
- Regularly spending more than you take in every month
- Experiencing rapid growth, but you are not able to save cash
Consistent lack of cash liquidity and poor cash flow usually go hand in hand and are symptoms of a financially unhealthy business. To establish financial stability, tangible steps must be taken to permanently improve these issues.
Continuously running out of cash is among the biggest problems faced by businesses. According to a US banking study, 82 percent of business failures are due to poor financial management and a lack of understanding of how cash flow affects businesses. Adequate cash flow is the lifeblood of your business, and without it you cannot hire and pay employees, pay expenses, buy vehicles, pay yourself, or secure financing like loans and credit lines.
A strict handle on cash flow and adequate cash reserves, also known as liquidity, helps insulate your business during economic downturns, unpredictability, or some catastrophic event. It also allows greater flexibility and opportunity during periods of growth.
With proper monthly financial reporting and management, you will have more control over the timing of what goes out and what comes in, so knowing your costs and exercising tight expense controls are critical. Maintaining adequate cash flow requires closely tracking receivables against payables (especially payroll), and if you do not produce monthly financial statements, and track your costs and expenses on an ongoing basis, managing cash flow will be difficult to impossible.
How to Improve Cash Flow
Improving cash flow will create long-term benefits, including financial stability, increased flexibility, and the ability to weather any challenges, disruptions or economic downturns.
- Update Your Billing Practices: Do not direct bill clients unless they meet specific revenue and contract criteria. Establish strict written payment terms that are agreed to in advance. Consider offering discounts for fast payment and charging late fees for any that go over 30 days. Customers that repeatedly pay slowly should lose direct bill privileges. If you must direct bill clients, send out invoices quickly—ideally the same day the trip is performed—and provide wire and ACH instructions. Invoices should be easy to read with the terms clearly stated. Have the due date stated in a few places along with terms that include late payment penalties.
- Increase Payment Channels/Methods: Opening up more payment channels and obtaining buyer payment preferences is a valid strategy to increase cash flow. Suppliers with automated credit card acceptance and ACH instructions receive funds faster than those waiting for paper check runs and the mail. Overall, the best automated accounts receivable processes offer customers as many digital payment channels as possible to speed up cash flow and reduce payment lag.
- Review All Costs and Expenses to Attempt to Lower Them: If your business has consistently poor cash flow, then a bottom-up profit and loss review, including accounts receivable (i.e., what you are owed) and accounts payable (i.e., what you owe people) is warranted. This will show you what expenses can be reduced by negotiating with vendors or be eliminated. After you have reviewed revenue and expenses, a budget process with monthly forecasts is a useful exercise. Any way you slice it, poor cash flow can only be permanently solved with increases in profitable revenue and or significantly lowering expenses.
- Increase Prices: Increasing your prices is a concept that scares many transportation business owners because they worry it will lead to reduced sales. It is usually prudent to increase pricing on larger vehicles that are scarce or services with limited competition in your area. When increasing prices, always be prepared to have tangible reasons you can convey to clients who may question why you raised prices. With fleet insurance and the cost of replacement parts and maintenance at sky-high levels, this should not be hard to do.
How to Improve Cash Liquidity
Improving cash liquidity ensures that you have sufficient cash on hand to meet your short-term obligations when they are due. Here are some ways to enhance cash liquidity:
- Create Cash Reserves: Set aside a portion of net profits as a cash reserve to cover unexpected expenses or downturns in revenue. If you are not making a profit to begin with, find out why. Maintain enough cash to pay fixed expenses for 4 to 6 months.
- Speed Up Accounts Receivable: Incentivize fast payment from direct bill customers by offering a discount for early payments. Implement efficient invoicing and collections processes. Follow up on overdue invoices to minimize delays in receiving payments.
- Optimize Accounts Payable: Take advantage of vendor discounts for early payments while maximizing payment terms to preserve cash. Negotiate favorable terms with suppliers and consider consolidating purchases to streamline payments.
- Shed Unproductive Assets: Free up cash by selling vehicles that are not producing revenue up to industry averages. This will create cash reserves and lower costs like fleet insurance, repairs, and maintenance.
- Know Which Vehicles Make the Most Gross Profit: Focus growth and revenue increases on vehicles and services that make the most money. Sedan and SUV transfers generate the lowest gross profits; larger vehicles and charters will make the most profit margin.
- Streamline Operations: Improve efficiency and cut expenses to increase profitability. Look for opportunities to streamline processes and reduce labor by eliminating manual processes using technology, combine positions, or outsource functions.
- Diversify Revenue Silos: Explore ways to offer more services to existing customers and diversify your revenue. Offer reciprocal services like airport transfers in other cities to frequent users of your airport service, which potentially turns two trips into four on the same reservation call.
By implementing these strategies and maintaining diligent monthly financial reporting and management practices, you can improve the cash flow and cash liquidity of your business and ensure its future financial stability regardless of disruption or economic downturns. [CD1224]
Ken Lucci is the principal business analyst and founder of DrivingTransactions.com. He can be reached at klucci@drivingyourincome.com.