Case studies in cash management 101 – managing cash flow to meet payrolls during up and down markets

Gloria Gibbs Marullo

For most small businesses, employees account for the biggest expense and the largest cash outflow, which poses a major challenge: How do you manage age cash flow to meet payroll through yearly ups and downs in customer demand for your products or services?

Clearly, there are various ways to approach this problem. Here are the solutions that work for three different businesses.

A Seasoned Player

Joe Sergio, of Sergio’s Pools & Spas in South Bend, Ind., had to find a way to boost business in the cold months, when pool construction and maintenance grind to a standstill. “Managing cash flow is my No. 1 stress,” says Sergio. “Employees are my second.”

Four years ago, Sergio and his two partners – his brother Tony and brother-in-law Al Scott – hit upon a solution. They started First Response Construction, a business that repairs fire damage.

“Pools are obviously seasonal,” says Sergio, “and most of the fires happen in winter.” Together the businesses employ 50 people year-round. Some specialize in pool construction and maintenance, some work in fire-damage rehabilitation, and some make up a “swing” force that works at each company.

“We’ve never had a layoff” says Sergio, “and we put a lot of time and thought into keeping employees motivated and productive. Our goal is to be both profitable and ethical – and have a good time doing both.”

To keep track of cash on hand, Sergio uses a computer to generate weekly and monthly cash-flow projections. When you talk about cash flow, you need to differentiate between growing companies and stable ones” he explains. “Projecting cash flow is never easy, but with growth, you have to start doing things like projecting payroll as a percentage of sales instead of absolute dollars.

“Growth means having to hire new employees, buy new trucks, and keep bigger inventories” he continues. “You also end up with bigger receivables. When you have three or four $100,000 construction rehab jobs, and the insurance company pays a lump sum on completion, you can tie up a lot of money for a long time.”

Avoiding The Gorillas

For Chris Batalis, president of Heptagon Inc., an advertising agency in South Bend, cash management and managing the size of his work force are two sides of the same coin. And for Batalis, both come easily. “After all,” he says, “I started out 28 years ago as a loan officer.”

He soon switched hats, however, and rose through the ranks to become the bank’s senior vice president of marketing before leaving to start Heptagon in 1979. I’ve built a career and a business marketing” says Batalis, “but when it comes to cash, I still think like a loan officer.”

He has 17 full-time employees, and payroll is by far his firms largest cash out-flow. To accommodate the inevitable ups and downs in demand from ad clients, Batalis supplements his full-time staff with part-time time employees. “It works great” he says. “There are a lot of creative people out there who, for one reason or another, want a part-time schedule. It works for them, and it helps us run `lean’ without the `mean.'”

Batalis strives for steady, measured growth of 4 to 9 percent a year. To avoid cash-flow problems, he says, “we don’t want to grow too fast, and we don’t want any gorilla accounts.

“A gorilla account is any account that’s simply too big for your business. I’ve seen too many companies hire staff and buy equipment to handle one big customer and then have the client leave. That’s part of being a gorilla. You pretty much go when and where you please.”

As a rule of thumb, Batalis says, a gorilla account is any client that represents at least 20 to 25 percent of a company’s total revenues. “We’ve had to turn some away,” he says.

The banker in Batalis keeps a close eye on both credit and collections. “Our philosophy of business is to deal only with people who pay their bills on time” he explains. “We don’t have a large number of accounts, and that allows us to keep tight control over accounts receivable.”

Overtime To Stem The Tide

While part-time employees solve Batalis’ need for an occasional boost in his work force, JoAnn Martin and John Reck, co-owners of Excel Press Inc., in Kalamazoo, Mich., opt instead to give employees overtime whenever orders surge.

Excel Press specializes in foil stamping, embossing, and die cutting. We have a reputation for quality that keeps our commercial printing customers coming back,” says Martin.

Started in 1986, Excel has grown from one employee to seven. The right employees are critical in the printing business, says Martin. A person with prior printing experience can do a reasonably good job within a few months. But it typically takes at least two years to become technically proficient, she explains.

As a result, Martin and Reck offer employees flexible hours and lots of overtime. time. They use overtime as a barometer to determine when to add another full-time time worker. “When the (overtime] workload starts to get out of hand, we know it’s time to hire another person” says Martin.

Because Excel’s client list is small, credit and collections are not usually a problem. Excel requires new clients to complete a credit application that asks for references. “We recently had a client go bankrupt, but overall our clients pay in 30 days” says Martin.

Extra Efforts

To help them over cash-flow rough spots, all three companies have hnes of credit at their banks. “We can forecast the long-term growth of Excel,” says Martin, “but from month to month over a 10-year period, we can’t see any predictable pattern whatsoever.”

Batalis and Sergio also have tried “sweep accounts” that periodically move excess cash out of a company checking account and invest it in money-market or other funds that yield a higher return. While Sergio is satisfied with his company’s sweep account, Batalis canceled his. “We gave it up,” he says, “mainly because cause the costs of maintaining it outweighed the benefits.”

Cash management is a challenge that each small business must face and resolve on its own terms. As the entrepreneurs above demonstrate, its possible to use a kinder, gentler philosophy of cash management to keep both cash and employees working.

COPYRIGHT 1996 U.S. Chamber of Commerce

COPYRIGHT 2004 Gale Group

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