The Best Ways to Manage your Cash

Because I’m an entrepreneurial CFO, I have real life experience with managing cash flow in a business.  I owned a chain of retail ski stores in the late 1980’s.  Due to the seasonality of that type of business I’d forgive you for thinking that the cash flow would be terrible in the summer time, but the reality is I never used my line of credit.

There were two main reasons(outside of expense control and  cash conservation strategies)I managed to avoid resorting to that for all those years:

Number 1: Closing all of our store locations every off season.   Our specialties were equipment, clothing and accessories all made for skiing. That was our area of expertise, and what our customers trusted us with. If we were to keep all our locations open year round by also selling summer goods (like most of competitors at the time), not only would we have had slow inventory turns, but we also would have had carryover of unproductive non-ski inventories preventing us from investing in what we did best (aka what the consumer also knew we did best).  Invest only in inventory that is productive (with lower unplanned markdowns and higher inventory turns) for cash flow and profits.  Avoid tying cash up in any unproductive inventory, because in the end that will only give you cash flow problems, unplanned mark downs and lost profits.

Number 2: I made sure that I would have very little merchandise every December 31st by running my inventory down. I ensured that I could purchase close out merchandise in January, February and March, then pay for it in October, by working with my suppliers.  January, February and March are strong periods in the ski business (especially if it snows locally), and as a result of my first two endeavors, I was always able to take my sales from those strong months to finance the summer. The months of August and September are the real start of the winter buying season, and every year at that time I would have a grand opening (closing my stores every summer allowed me to have a grand opening every year) and a major tent sale. These events combined easily covered the October close out bills.

If you own a seasonal business or if your business happens to have periods of low sales activity, you need to identify your business cycle, and this is something a CFO can help you to do. The business cycle as I am defining it here being the time between you receiving the inventory or raw material and you getting paid for the final product. Receiving payment for the final product before paying for the inventory and/or expenses of production and/or the expenses of selling the inventory is the ultimate goal. You can create strategies and work with suppliers (also things a CFO can assist you in doing) in the way that most productively meets your needs if you understand your business cycle.

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It may be hard to believe in the current economy, but one of my clients is actually having a really good year, and I believe that’s due to the fact that this particular client makes very unique and effective sales presentation.

Recently my client added some new employees in order to keep up with the demand and he asked me if he should buy a new truck. He said he thought it would make one of his new crews more productive.

I immediately went back to my own business experience, which prompted me to say,


When I had a peak in demand and was doing really well, I went overboard with capital expenditures. I added locations and product lines because I thought the huge spike in demand was never going to end.

This was a big mistake.

I told my client that we hadn’t even done any testing yet to see if our new employees were going to remain as permanent employees and he was here already thinking about buying trucks to make the hypothetical employees more efficient.

My client came back with the suggestion that he could take one of the new guys and let him go solo on the truck to do some lower end jobs. I held firm that what we should do was nothing and review this in another two months.

Two months is a good amount of time to let something of this nature sit, because we will see if we still have the same sales backlog, we will see if the new employees are working out, we will also have a better idea how as a business we handled this excessive amount of sales activity from a quality standpoint and we will know if it is profitable to do these smaller jobs. We will also have a better idea to see if there is time to market the smaller jobs for the truck strategy my client talked about. I told my client that business owners (me included) have a tendency to really over spend when times are good. They almost do it because they have the cash available to do it and things are going so well so they think they need to capitalize on this success without thinking that these great times are not going to last forever and the overspending still has to be paid for. As I told my client this he began to understand and he thanked me for putting the breaks on the idea. I told him you must be equally as disciplined in managing upturns as in managing downturns and you must never think you can afford something just because the cash is currently available. You must constantly look to conserve cash unless a real return on the investment can be forecasted with accuracy and all of the other areas of the business are stable and tested as cash is the lifeblood of your business.

This exchange between my client and I is just one more example of how it is a great advantage for a business owner to have an entrepreneurial chief financial officer. The entrepreneurial CFO can reflect back on the many real life business experiences and apply those experiences for the benefit of their clients.

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Overhead Calculation

The three components of cost are material, labor and overhead. Because many business owners don’t understand how to calculate overhead, or how to incorporate it into their analysis, I see a lot of business owners eliminating overhead from their cost calculations, which can lead to operating losses and cash flow problems.

If you are confused as to how to calculate overhead, the easiest way to do so is as a percentage of sales. Take all of the projected overhead expenses for the period (a month, a quarter, or a year) you want to analyze, and divided these projected expenses by the amount of projected sales. Going forward, if your projections are higher or lower than your sales by 10% or more you should recalculate the overhead rate based on your new projected sales, and you need to do the same thing if your projected expenses are off (because they’re higher or lower than they should be) by 10% or more. The sales dollars associated with each transaction or quote needs this percentage applied to them, or you need to perform the same calculation with last year’s actual results for overhead and sales on actual results instead of projected results. I myself prefer using projected results. There are other options for calculating overhead that also use labor hours and dollars, but I find using sales is the best option (unless the business is in the trades, such as a plumber or electrician, or it’s a manufacturing business, in which case I like to use labor hours, which makes more sense for these types of businesses because you simply assign overhead costs per direct labor hour and all you need do to know your costs is estimate the labor hours for a job).

When it comes to the calculation of overhead and incorporating overhead in cost calculations, there are many schools of thought. There are some people who avoid accounting for overhead altogether by saying, “The overhead will begin to be paid anyway, no matter how much the sales price exceeds material and labor, and that’s the only objective.”, and to them I say:

First of all, if sales aren’t actually high enough for you to employ this school of thought you are guaranteeing that you will NOT be profitable. You will eventually have to pay for all the fixed overhead, even if sales exceed material, labor, and variable overhead* by a few dollars, BUT the sales must be high enough and that is a HUGE risk.

Secondly, although an argument can certainly be made that any sale that covers some overhead is better than no sale at all, are you absolutely SURE there is no other sale that you could make that covers more or even all of your overhead that you’re not bothering to find because you justify just giving away your products and services as long as it covers some overhead?

*The business owner sometimes calls expenses which can be considered overhead but are actually expenses which are variable to sales overhead. These are things like credit card fees or gas fees if you need to travel to perform a service, and they need to be identified as variable overhead and incorporated as part of the expense component deducted from the selling price to determine profit before fixed overhead.

Every business owner really should know what the overhead component of their product or service is so that they have a grasp on what their true bottom line is on each and every transaction or quote. Knowing that bottom line on your every transaction, unless your expense or revenue projections are way off, will set you at ease by ensuring that all your costs are accounted for. At the end of the day the business owner can use their own discretion as to whether a sale that does not entirely cover fixed overhead is worth making. If it were me I must be extremely confident that there is no other sale to make that will give me a better return before I would accept a sale that only partially covered fixed overhead. For example let’s say you know with reasonable certainty that your business is in a state of low demand maybe due to seasonality or economic conditions. If I am convinced there is no other sale out there that is going to give me a better return or if I think the customer is worthwhile to keep because the customer will give me long term potential at higher profit margins then I would make the justification that I am at least covering some fixed overhead.

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