There is a huge difference between profit and positive cash flow. Many businesses may have uniform costs and sales revenue year-around while others have seasonality to their business. For instance, the toy industry faces this issue with most of the sales occurring over a few months, but production is made year-round. In addition, if you give payment terms to your customers, you have a timing disconnect with expenses versus revenues. The longer the payment terms allowed, the more cash you will need to meet day to day expenses.
Revenue and expense timing – Make sure you understand this in detail. If your business is required to do work over a long period of time for a given customer, make sure you receive progress payments. Your suppliers and employees will require payments prior to payment from you customer. Don’t be shy is asking for what you need. Customers can be more accommodating than you might believe. If they are unwilling to make progress payments, make sure you have working capital availability and that your sales price reflects the cost of borrowing money for this customer.
Payment terms – Customers will always ask for payment terms. You don’t have to agree to their request. They will always take the terms you are willing to allow. The second component of this is making sure that customers adhere to your terms. This takes discipline and diligence. Delinquent customers must be policed to insure adherence to payment terms. They will use you as a no cost bank if you let them.