Nickels and Dimes

“Nickels are precious, Mike.”

I almost laughed in his face.

This was one of the nuggets of wisdom I received from one of my mentors, long ago.  He always insisted that we hold tightly to every nickel and dime we had in hand, or had earned but not collected.

I used to think this was an extreme point of view, but experience has shown it to be valid.  Because so many years have passed, I might say it a bit differently today:

Dollars are precious.

Particularly when it comes to managing our cash.

As it is such an important aspect of firm management, I’d like to make a few more comments about cash before we move on to other topics.

As I said earlier, cash is the blood in the firm’s veins.

This explains why larger companies have a dedicated treasurer, who– among other things– is responsible for managing cash.

In my last post, I argued that we must always be forecasting our cash flow, and alluded to the negative consequences of running short of cash.  Unless the situation can be turned around quickly, serious damage can be done.

Prepared for Action

What can or should we do if we see a shortfall coming?

First, we should always maintain a commercial Line of Credit, making cash available to borrow on a moment’s notice.  Adding debt to an already difficult cash position can be dicey, so borrowing should only be undertaken when the firm can see its revenues and collections generating enough cash in the near future to allow repaying the debt.

In lieu of borrowing, or certainly alongside any borrowing, the firm should consider immediate action in the following areas.

1. Speed up collections

We should immediately take action to collect our largest unpaid balances, beginning with the oldest.  This money is ours, and should be sitting in our bank account, rather than our client’s.  We shouldn’t allow clients to force us to borrow money, while we loan it to them for free.

2. Reduce leader salaries

This should happen quickly, without too much deliberation or hand-wringing.  After all, we are the ones responsible for the situation, and the ones who must resolve it.  The savings are immediate, and require very little effort.  As soon as the problem is fixed, these salaries can be restored and any deficits repaid.

3. Manage Accounts Payable

We should assess our AP carefully for any obligations that might realistically be stretched out.  Are we paying any obligations faster than they really must be?  Are there any annual budget items, such as liability insurance payments, that can be paid in smaller installments?  This may come with some interest cost, but that is better than the alternative.

4. Refinance any old debt

Do we have any outstanding notes or loans that can be refinanced?  Perhaps we could pay interest only for a short period?  Creditors usually don’t want to see their investments at risk, so they may be willing to help.  You don’t know unless you ask.

5. Finance recent investments

Have we made any recent investments in hardware, software, or other office improvements?  Our bank may be willing to offer a 3- or 5-year note for such things, allowing the firm to recapture that cash, and repay it over time.

Let’s not wait too long to take action to avoid cash problems.  We should always be on the lookout for ways of guarding cash.

Those nickels and dimes are precious.  They add up to real dollars.

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