What is the key to business growth and survival? If you want the answer to that question and so much more, you've got to join us for this episode of the Inside B.S. Show. Hey now, it's Dave Lorenzo, I'm the Godfather of Growth, and today we have another Mentor Moment for you, and today we're discussing the key to the survival of your business. That's right, we are discussing the very thing that is the lifeblood of your business.

We're talking cash flow, and what better person to mentor us on cash flow than Harry Sandrowski of Sandrowski Corporate Advisors. Hey, Harry, how are you doing today? I'm doing great, Dave. How are you doing? I am absolutely fantastic, thank you for asking.

So let's get right into it, because I find that people are often confused when we talk about the thing that is the lifeblood of their business. Can you explain to the folks who are with us today what cash flow is and why it's critical? Well, cash flow, the reason you call it the lifeblood of the business is because it's your blood. You know, the bottom line is you take in cash through a couple different ways, either through sales, retainers, deposits, and you have to pay out cash to pay your rent, to pay payments on maybe the company vehicles, you know, for employees, expenses, for insurance.

You know, if you have a product-based company, you also have inventory. So when you look at your cash flow, you can't look at your bottom line, because your bottom line is not going to equal your cash flow once you get into buying equipment, buying inventory. So understanding what your cash flow is is critical to the business, because if you don't, you won't be in business very long.

So Harry, what are the most common cash flow mistakes businesses make, and what can they do to avoid them? The most common mistakes that we see is not enforcing their contracts, not enforcing people, paying them on time. And that does several different things. One is not only negatively impacts the business, you might have to borrow money from the bank because you now need a working capital line in order to pay your bills, which means that you have interest expense, which means you might have to pay your accountant to also send something to the bank.

So it becomes like a spiraling of expenses. But once you start allowing your business not to be run in a way where you're collecting the money as your contracts call for, that's when you're going to start on a very slippery slope, because what happens then, in many cases, you end up not collecting 100% of what's owed to you. Other companies could have gone out of business, or they just might say, Harry, I'll pay you, but I'm going to take a 10% discount.

And then you're kind of in a bad situation, because then obviously you need the cash to get everything going, and so it becomes this revolving door with respect to you enforcing that. And it could be a big customer of yours, and once they do that, they know they're going to be able to do that in the future. So to me, it's the enforcement of your contracts and the enforcement of the payment terms is one of the key considerations that you have to have.

But now you have to understand when you're going to need that money, how you're going to need that money, what are industry practices, et cetera, et cetera. But to me, that's the most important thing where people get lax. Okay, then what are some creative ways that businesses can improve their cash flow? Well, creative ways would be you increase your deposits that you require before you actually start work, especially if you're a manufacturer and you're manufacturing some type of customized equipment or customized part.

And what you do there is you would ask for a deposit up front, and then you would ask for progress payments during the time period which you're doing that, because during the time that you're building that over a 30 or 60 day time period, you still have to pay the rent, you still have to pay your employees, you still have to pay your insurance, and you don't want to get your cash flow real lumpy. So that's what you would do is you would put that in place. Some people would actually make people prepay.

You know, today, there's a lot of businesses now you have to write the check up front before, you know, they're going to give you any services at all. So it really depends on the business that you're in. But cash is king.

You get it up front, and you get paid timely. That will solve a lot of the other issues that you run into from a cash flow standpoint. No, that's great advice.

Thank you, Harry. What should businesses do with their strategy if there's an economic downturn coming? Or let's just say there's a period of uncertainty ahead of us. How should we adjust our business practices to maximize our cash flow then? So there's something called a 13 week cash flow that many people do when they're in trouble or like in a bankruptcy type situation.

So what you would do is you would go through all of your all of the cash that's coming in, all of your expenses, and map it out for the next 13 weeks. And that happens to be a quarter of a year. And what you're doing is you're rolling that all the time.

And what you're doing is you're looking at what's working, what's not working, so you can adjust to make sure that you're going to be in business. And the other thing I would say is if you know you're going into an economic downturn, you really have to look at your staff and look at your employees. And you might have to do the one thing about cut, cut, cut.

And the one thing you, if you know you're going to have to cut, cut it off as early as you can, because it's, it's not going to help you down the road and it's only going to hurt you. And that way you have the team in place and get you back and maybe get hire those people back in a year or something. But the longer you wait on that, you'll see the people who have been through it before, what is the first thing they do? They start cutting up out people.

So that's just, that's just been a proven formula that, you know, has worked well in the past. Now, you mentioned access to capital earlier, like loans or lines of credit. What role does that access to capital play in cashflow management? It has a huge role because sometimes you just will run into, you know, a problem and it wasn't intended.

You might've had good contracts. It could be that you just have an emergency, you have to buy a large piece of equipment or whatever the case may be. So having a working capital line or a line of credit is critical to any business.

And what I would advise businesses to do is to have that in place before it's a problem. So you can actually get a line of credit for, let's say $500,000, leave it out there, keep reporting to the bank, make sure that gets renewed every year because you never know when you're going to want it. If there's a downturn and you need the cash, then you're not going to be able to get the cash.

So, and if you see the downturn coming, some people have actually gone, Ford Motor Company actually did this one before all the economic tsunami hit, you know, 10, 15 years ago, they went out and got a lot of financing on their assets and then we had the great recession. So they would have not been able to get that money beforehand. So you have to kind of plan out a little bit better about what the, what your downside could be.

And look, we've had some black swans in the last couple of 20 years. So you don't know where it's going to come from, but they're going to happen. So you have to be prepared for it.

Harry, is there a difference between the way a service-based business and the way a product-based business would handle cash flow? Yes. So product-based business, you have a couple of different things. One is you are, you've heard of supply chain.

So you're bringing in goods, they could be in the United States, it could be from a different country. So a lot of times you're putting out cash earlier on before you actually receive the inventory and then there's a way to make sure that you actually get that in place. So you tend to have more cash outlays before you actually receive the goods and sell them.

So you're going to need to have more flexibility. That's where, let's say an inventory line of credit or a working capital line might come into place. In the service-based, you have the same thing, but kind of, you're not buying product, it's your people.

So if your people are going to be based on an hourly rate or a monthly retainer rate, what you want to make sure of is that you bill often, you bill early, and you collect that money. In many cases, the service businesses now are requiring that they be paid up front. So like if somebody hired an interim CFO, you want them to start the first month, that first month has to be paid in advance.

And then they do that each month, and if they don't pay, the guy doesn't show up. And a lot of these things have been put in place because of the bankruptcy rules and things of this nature so people don't get caught short. So if you just think about it in that way, that's a good way to make the differentiation.

And the problem with professional services is that people can always dicker with you with respect to what level of services were performed, you know, what was the cost. So I mean, I've heard, you know, people at the Detroit Athletic Club in the locker room, the lawyers will say, yeah, just don't pay the accountants or the CFO, let them be last. So it's not uncommon for them just to take that across the board and say that.

So you know, you got to be on top of it, and if you're not, it's going to hurt you. Now, the other interesting part about that being in a service business, if you demonstrate to people that you're not going to screw around and you're going to want your money up front and get paid timely or else you're not going to do the work, they have a higher degree of respect for you because they see that you're more of a, you know, a good business person on what you're doing, let alone what you're doing for them. What about seasonality, Harry? How do businesses that have different seasons where they make more money and then less money, how should they handle their cash flow? See that, that goes back to the 13 week that I mentioned to you because, you know, you're going to have seasonality.

Seasonality could be for 12 or 13 weeks, could be for longer. So you're building that inlet on time so you can adjust to it. So you'll have seasonality, let's say in a landscaping business, because they have to ramp up everything for that timeframe, especially like in a northern states.

But at the same time, if you're a retailer, obviously you have big months that are going to be November, December, January. So you have to ramp up the same way. So you're monitoring your inventory during the year and then you know where your ramp up is going to come.

So you have to save enough cash in order to buy those goods so you can turn them in the months that you're going to be profitable. So seasonal businesses are, you know, you really got to be on your toes about what you're doing there because if you get caught short, you know, people are funny. If you don't have something they need, they're off to the next person and your ability to get that person back next year is not very high.

Yeah, that's a great point. Okay, Harry. So what metrics should business owners track to ensure they have a good handle on their cash flow? Okay.

So you should have what we call our KPIs, key indicators, productivity. So you're not only looking at your cash flow, you're looking at, you know, how many jobs you have in place, what's your profit margins, you know, et cetera, et cetera. I think that is, you know, key to the cash flow.

But the one thing you need to do is, and there are a lot of places you can get at this information, is find out in your industry what is the average number of days, let's say, for receivables. And John Alfonsi, who does our evaluation work, will tell you a lot of times he can tell the quality of management when he looks at the balance sheet and sees a disproportionate amount of receivables or work in process, and then he compares that to the industry and they're much longer, then he knows the management team is not as sharp as they could be. And on the other hand, they also might be very tight on that.

So they're very good at collections, they're very good at getting out the bills and collecting. That would show an indication on the other side. So it's kind of a win-win or a lose-lose type situation about handling the cash flow.

But if you don't stay on top of your cash flow, you're not going to be in business very long. All righty. Thank you very much, Harry Sandrowski.

If you've listened to today's show and you have more questions, give Harry a call. If you're struggling with cash flow issues or you're concerned about what's on the economic horizon, there's no better person for you to talk to than Harry Sandrowski. You can reach out to Harry at 866-717-1607.

866-717-1607. Sandrowski Corporate Advisors is a CPA firm with a different perspective, and they're on a nationwide basis because they're part of Prosperity Partners, an accounting firm that works all over the country with both tax and advisory services. And they can perform any accounting function that you need in a timely fashion wherever you are.

So if you're listening to the sound of my voice and you have an accounting question, you need to call 866-717-1607. Sandrowski Corporate Advisors, a CPA firm with a different perspective.