November 9, 2016
Mastering cash flow

Mastering cash flow

Nathan Helder shares tips and strategies to ease tight times, and promote smooth landscape company operation


Nathan Helder is a regular business management source for Landscape Trades. His company, Gelderman Landscape Services of Waterdown, Ont., is well respected within the green industry. Helder also operates Southbrook Consulting, where he teaches his business principles to company owners from a range of sectors – clients willing to learn and do better. Helder shares his cash flow strategies in this issue, hoping to prevent some insomnia among landscape company owners.

A nice black net income number on the Profit and Loss Statement does not mean cash in the bank, and Nathan Helder understands the reasons in detail. There is a huge delay in the time receivables show up in reports, and the time contractors get paid. Capital expenditure costs above depreciation must be paid. And companies need to be fed during the interim. 

That lag certainly applies to residential design/build, and commercial accounts can be even more challenging, often stretching out into 90 days. Tight cash is very common for many small businesses; the following practical strategies from Helder help convert income to cash as soon as possible.

Understand and analyze your current cash position

Helder is a numbers guy, and he encourages entrepreneurs to divide assets by liabilities to get a very valuable number: your Working Capital ratio. The goal is a ratio of 1.2 to 3. Ratios below 1 – negative working capital – indicate cash flow problems. Your company may be carrying a too-large debt burden; servicing that debt is squeezing your ability to operate. You might not be making a profit. Or your company may be growing fast, resulting in similar cash problems. 

A business owner in a negative working capital position already knows it — he or she is sweating payroll and stretching out payables. But Helder says analyzing and knowing your exact ratio number helps take back control. He says if your ratio improves even one-half of one per cent, you will notice.

Have a short-term cash plan

Helder recommends keeping a cash flow worksheet, updated when times are tough. This snapshot reveals your cash position over the next week, and the next month, which is typically two payroll periods. He uses a simple Excel spreadsheet for planning.

Be accurate in lining out all your upcoming expenses, including lease or loan payments. Don’t forget monthly or quarterly government remittances. And Helder advises business owners to be conservative, since having more cash on hand than projected is never a problem.

In his consulting experience, Helder sees far too many companies try to manage cash by looking at account balances. 

Look at the big cash picture

According to Helder, yearly cash flow projections go hand-in-hand with the short-term worksheets. He urges all business owners to do annual budget forecasts, and annual cash flow projections — especially companies with marked seasonal variations, such as landscape contracting and snow removal. The primary, obvious benefit is to help you manage expenses over the year, but forecasting also allows you to establish credit with your banker at the ideal time — when you don’t need it!

Structure deposit policies for your advantage

In construction, the smaller the balance due upon project completion, the better your cash position. Specify 30 per cent due before work starts, 30 percent midway and 40 per cent on completion – due on the last day of work. Or even 40:40:20. This policy gives you two big advantages; cash flow during the project, and less risk at the end in case the customer claims a deficiency. It helps to visit the client in person when the times come to collect payments.

State all terms clearly in contracts; customers appreciate the clarity. “Keep in touch with your clients constantly, it prevents surprises,” says Helder.

It may benefit cash flow to offer discounts for payment in full before a project begins, but Helder cautions you must know your costs to make this work.

Prompt invoicing protects you

Prompt, no-nonsense billing strategies carry benefits beyond the obvious. Customers actually appreciate clear and consistent invoicing policies, and they actually do want to pay. Delayed invoicing allows customers to “hold back” until deficiencies are corrected.

At Gelderman Landscape Services, maintenance customers are invoiced the first day of each month, for that month’s work. Commercial customers can be a little slower and more challenging to collect; simply asking about their payment schedule — when they cut cheques — can help time invoicing to your company’s advantage.

Even though it sounds less efficient, you can collect faster if you send smaller invoices, more frequently. Helder says customers are less likely to argue over smaller amounts, while it is easier to resist paying larger amounts. 

Helder recommends assigning a specific person in your operation responsible for collections. His company calls maintenance customers on Day 45 of the monthly billing cycle, and Gelderman’s policy is to “Kill customers with kindness.” This system trains customers to expect consistent, respectful payment requests, and to stay current.

The sales staff at Gelderman is responsible for collection, and they receive commissions on collected revenue only. The company motivates managers by basing remuneration on company profits.

Controls enhance revenue

Nathan Helder is sold on meticulously tracking job costs. He says this is especially critical with change orders. He says to always get a confirmation, because ambiguity, misunderstandings or differences of opinion always result in delayed payment.

Helder takes tracking job costs so seriously, that his company actually runs profitability-by-customer reports. The reports let Helder know when he needs to raise prices on specific customers, or when he needs to let one go. (Helder says he introduces a better-fit supplier when “firing” customers.) While this level of detail might sound unachievable, Gelderman Landscape Services is making it happen in real life, and the company’s cash position is stronger as a result.

Control spending, partner with suppliers

Every penny saved improves cash position, and Helder is clearly an advocate of keeping an eagle eye on expenses. He even builds a savings plan into his scheduled expenses. Besides the benefit of the resulting Rainy Day fund, the practice makes things just that little bit tighter, to force owners to be smarter with spending. 

Helder also believes in true partnerships with suppliers, based on communication and honesty. He relived telling a supplier upfront cash was tight, and Helder was being forced to delay payment — and the supplier thanked Helder: ‘Nobody else tells us!’ Negotiating payments terms is always better than withholding payment, he says.

Establishing trust with suppliers can benefit cash flow in another way, according to Helder. “Ask what the supplier can do to cut your costs; it never hurts to ask, ‘What can you do to help us grow?’” Suppliers may respond with an idea or opportunity that is modest from their perspective, but quite helpful to you.

Liquidate costly clutter

Extra inventory or unused equipment is found in almost every landscape yard. The Return on Assets ratio, Net Profit divided by Total Assets, indicates efficiency — the goal is 20 per cent or higher. All unused items represent tied-up cost that is doing nothing for your company — and Helder advises contractors to clean up and liquidate. He says Kijiji works great. Be careful not to give the appearance you are selling out of distress, but do get cash in place of unused, unproductive items. After all, Helder says, you can always rent equipment back if needed. Contractors may also be able to rent out excess yard or office space on a short-term basis.

Expand your options

Helder is clearly dedicated to keeping his company on an even keel through the challenges of seasonality, as well as growth. Toward that end, he shared some strategies on working with bankers. Helder meets with his bank every year, and he specifically invites the bank to his office, which give him better control of the meeting. Helder says he summarizes and explains his financial statements, including ratios — “Because they are important to me!” This goes a long way in projecting confidence to banking partners. And Helder believes regarding the bank as a partner is just as important as forging relationships with other suppliers. “It allows me to ask for more money, with fewer restrictions.”

Helder is a believer in using his line of credit when needed; he calls it cheap money. The bank may agree to provide a “bulge” to your line of credit, to reflect your company’s seasonal needs. According to Helder, using cash to buy depreciating assets is a mistake; he recommends renting, leasing or subcontracting instead.

Helder also mentions it is nice to have some cash outside your business, so you can put it back in to improve your balance sheet as needed when bankers are looking.