Cash Flow vs. Cash on Hand

Exactly, what is Cash Flow?  Many of our clients considered it to be the pattern of payments received from their customers.  Their focus on “increasing cash flow” was simply about generating more sales; and as a result, they depleted their actual cash on hand. 

Cash flow is not a river, it is the tide. During low tide, cash on hand can be swept away. A quality business plan mitigates the low tide and preserves cash on hand in order to meet necessary obligations for operation…such as payroll. 

Let’s consider one of our applicants.

Ernie started a commercial ice freezer business six years ago.  The company supplies new ice dispensers and nearly every part needed to make the broken machines run again.  Ernie runs a tight ship, but he must keep manpower available for parts delivery and repair.  In the summer ice sales for his customers is big business – they can’t be without this profit center for long.

The company generates average billings of $250,000 a month, net profit is 9.5% = $23,750 per month.  So, on paper, Ernie’s  doing pretty good.  However, digging deeper -

Monthly billings range from $190,000 to $305,000.  During the lean months Ernie is lucky to break even. His cost of goods sold is 50%, delivery and repair labor equals 22%, and administrative labor equals 11% of gross Sales.  Every Friday Ernie’s bank account is drained $19,000+ for payroll; and the company doesn’t always have the cash necessary to make payroll.  Quite often, the account balance is left near or below zero awaiting a customer payment; and Ernie becomes The Bank of Ernie, once again, personally loaning the company money.

On average Ernie sees an average monthly profit of $20,000,  but the company is caught in a heavy cash flow tide; and the depletion of cash on hand severely limits its ability to comfortably plan for the growth of his company. 

Enter Payroll Friday. Payroll Friday increases cash on hand and calms the cash flow tide.

Payroll Friday funds Ernie’s payroll by using his outstanding invoices as collateral and reconciles the account with customer payments.  Once the payroll advance account is back to zero, the remainder of the funds are forwarded to the company.  As a result, the company bank account has a $20,000 (minimum) higher consistent daily balance.  With steady cash on hand, Ernie can take on more customers, expand inventory, enlarge the warehouse, or maybe take a well-deserved trip.

Conclusion

Like so many successful small businesses, Ernie has an ongoing concern, while to the outside world, he seems to be doing quite well.  However, no one sees the late nights Ernie spends solving cash demand issues – issues exacerbated by the inflexibility of payroll.  Ernie can negotiate payment terms with all his suppliers, but not his workforce.  Payroll shows up every Friday and demands satisfaction.  By utilizing Payroll Friday, he never needs to think about payroll again. 

And here’s the best part - the cost of Payroll Friday?  Less than 0.5% of Gross Proceeds.