Taking Control

In small businesses, cash management is everything. See how one new salon owner is getting a grip.

CAROL STREAM, ILL (Thursday, January 01, 2004) - There are many reasons why Joe Trippiedi, owner of Executive Tans in Carol Stream, Ill., should still be in business five years from now. For one, he loves the industry. There's also his very respectable business savvy. And, he is without question, 100 percent committed to doing what it takes to make his salon thrive. Unfortunately, sometimes that's not enough.

But Trippiedi has another secret weapon to use for those critical first few years when the unexpected occurs on a daily basis and poor decisions can cause years of financial strain or, worse, put you out of business. He has avoided many small business pitfalls already and will continue to do so mainly as a result of doing one thing. What's his secret? It's simple. He understands that cash flow is, essentially, a living, breathing organism that can make or break his business; and that in order to tame it, he has to manage it well.

Trippiedi is aware of (or is gaining a better understanding with every passing day) exactly how much cash comes in, where it goes, where it might be better spent and how much he needs to squirrel away for a rainy day. It is based on this ever-changing equation that he is able to make predictions about cash needs (oh, yeah, the slow season) and figure out where his money can work the hardest for him (that's right, reinvesting might be a good idea). Understanding cash flow is not brain surgery, we admit, but it's something that if ignored could "Potentially result in your landlord wanting his key back.

Gaining control over this monster is not only smart, says Normand Chevrier, business consultant and mentor, it is critical. Too often small business owners get caught up in the bigger financial picture and forget about what will keep the company in motion day-to-day. "People understand a profit and loss statement because they are documents that are commonly circulated and everyone talks about financial statements. But when you are a small company, expenses are nothing, accounts receivable are nothing, what really counts is how much cash you have available to pay-your debt. You can't pay debt with a check on accounts receivable. You pay debt with money in the bank. To me, the main, number one tool in a small business is cash management.


" I think it's important to know that, hey I'm going to have enough cash on hand for incidentals and for things that you may want to try. I want to be able to shift on a dime to do those things. I don't want to have my hands tired so I can't do anything and be forced not to be able to invest in the business because I didn't have enough money set aside or I didn't plan for it."

Joe Trippiedi, owner, Executive Tans, Carol Stream, Ill.


"Cash management is like controlling your own budget, only cash is important. Account receivabies is not money and only when paid becomes cash. Using a card creates account payables and you have to plan to make sure you have the cash to meet the payment when you get the card statement ... For a new business, for fast growing businesses or for a business with small capital, controlling cash movement is 100 percent control. Yearly or monthly financial statements are fairly useless unless you consider last month's news important."

FOR STARTERS

It only seems natural to think that as long as more money is coming in than going out, business is fine. And, although on a very basic level, this may be correct, it leaves the business owner vulnerable. The fact is, in a cyclical business like indoor tanning there will almost inevitable always be "bad"' months - especially if you are just starting out.

"Many people are very successful working for someone else and they think that by starting on their own they will earn more money," Chevrier continues. "And while this may be true on a long term basis, it is not for the short term. They have to reduce their money intake and leave the difference in the company to build its cash reserve for bad times. This is when you buy your umbrella."

Trippiedi opened his doors to an overwhelming busy season that brought a flood of clients and a boatload of immediate cash. This is where many people slip up. "I can see how someone new in the business can become enthralled with the fact that they are making ridiculous amounts of money in certain months out of the year, " says Trippiedi. "'Whether you are generating $60 or $70 grand in one month, you certainly can't take the approach that it's going to keep coming month after month like this. It does even out and you have to keep perspective."

Keeping perspective, says Chevrier, means maximizing your cash flow. Make sure all of your internal financial systems (i.e. payables, collections, etc.) are operating efficiently. Since the objective is to keep your money working for you, keep cash as long as, possible without paying any prohibitive interest charges, of course. The key is maintaining control. And control begins with making accurate. predictions,

This task isn't easy and is darn near, impossible in the first few years. The best bet is to base your initial predictions on industry and market research, and think short term as these predictions should change on a daily, weekly and monthly basis. "It's definitely a much more comfortable situation going into my second season," says Trippiedi, "I'm learning what I really spend in different areas; how I've overspent or haven't been efficient. In the beginning when you are just starting out there are so many more variables because you just don't know. There's so much tweaking that has to take place."

Chevrier notes that a major mistake many small business owners make is that they inflate the projected revenue and underestimate their spending. "It's better to have a surprise," he says, "when you are working with paper and figures then with reality itself. Then the second rule is that you have to compare the actual outlays and inlays vs. what you planned. Your best plan can look rather foolish sometimes. But this is how you face reality. If you don't, it's too late."

Chevrier always advises clients, that after making their projections, decrease cash projections by 25 percent and increase expenses or disbursements by 25 percent. "'People in business are usually not pessimistic, they are optimistic and they tend to think things will be fine and come out ok. But how you settle the fact that from year-to-year things are somewhat different is by planning ahead and then month-by-month comparing it with what you projected. You will learn to see the little subtle differences that
will help you make a better one the next time...Most people, at first, have no clue how to make their projections but by the second time around they are already better, and by the third time around they are on their way to becoming experts."

"anytime you have positive cash flow - enough to put some back - you should. This doesn't change."

TIGHTEN THE REIGNS

After making predictions, be sure to create a budget. (Only if you have a lot of spare cash can you avoid this, says Chevrier.) "In all other cases, please prepare one, stick by it, and record the actual cash in and cash out against what you had projected. This is your course of control management and how you learn to control your own cash flow. At first, do it for two-three months. After being demonstrated a dummy by real lifie, the next budget should be closer to real life...and continue with this until you do not need a formal plan/budget because you have it burned in your mind."

Maintaining a conservative budget is especially important in a business, that has seasonal peaks and seasonal lows. Lisa Forester, owner of Electric Sun in Stanley, N.C., knows the ins and outs of dealing with a cyclical business, Before opening her salon a year and a half ago, she owned a sand blasting company, "You can't work if it's too cold or if it's raining," she says. "So You hope that there's not a long rainy season...We always called it loaf, bread or steak. So, as much as I can, I try to plan for the slower months and incidentals. I continue to get better at it."


In addition to including the usual suspects (electric, payroll, etc.) in her budget, Forester also takes into account incidentaIs and other possible expenses. She never wants to be caught, unprepared. "I try not to let anything that I can possibly predict be a surprise," explains Forester, who strategically pays debt that can be turned back into cash if needed first, in case something comes up that she simply does not have cash on-hand to pay. I do this so that the other small things that come up - equipment breaking down or an acrylic that has to be replaced right away - gets taken out of the emergency fund and not the day-to-day predictable expenses.

Sticking to a budget means that, by default, you are creating a cash cushion of some type. This is vital. Regrettably, it's human nature, says Chevrier, to spend when there is excess. And this is where many small business owners trip up. They lose sight of cash management in the rush of the dollars during busy season. "People have a tendency once they have cash to spend it somehow," affirms Chevrier. "What you need to do is be just as tight with your money in the months of surpluses as you are when things are slow, The rule must be that it's' not because times are a plenty that you have to start overspending, you have to maintain your budget all, the time; 12 months out of the year."

Believe it or not, the incidental and economic issues can kill you. No one could have predicted 9/11, for example, and the events of that day reeked havoc on businesses across the country. For those. who had a conservative cushion, they, survived; many didnt.

"Any business can be unpredictable," says Burl Williams, owner of Electric Beach Tanning in Morehead, Ky. "And when you are a smaller business, no matter what industry you are in, you have to put some money away to make sure you have enough money to make it through the slow months."'

And, after being in business for 10 years, Williams still likes to lean on the conservative side. "Just because you have a great October one year, it doesn't mean you are going to have a great October the next year," he says. "You really can't depend on it. So anytime you have positive cash flow - enough to put some back - you should. This doesn't change."

THE CUSHIER THE BETTER

How much cushion is necessary? How do you know? "'You really don't," says Williams of Electric Beach Tanning. "You have to make your decision on the type of equipment you have and what it would cost to replace any particular piece of equipment. If I have one of my larger beds go down, it could cost me thousands of dollars if its, down just one week. I have to be able to have enough cash on hand to allow me to get that bed back up or, even, replace it quickly if I have to."

But, as Trippiedi learned within the first month of business, there are other issues that can quickly complicate plans for managing cash and maintaining a considerable cushion. Within a month of opening his salon, Trippiedi ran into an interesting dilemma. "In order to maintain and capture more of the market in my area," he says, "I needed to add more equipment right away. I had no idea, honestly, what the ramifications would be later in the season."

Having planned for the slow season with available working capital, Trippiedi felt confident to immediately reinvest $30 grand into the business. This move paid for additional investments later in the year in expanded air conditioning for his facility. Decisions like this, especially so early on, are difficult and must be made carefully. But if you are staying within a set budget, they probably won't come back to haunt you if they backfire.

Along with the incidentals and growth, necessities says Trippiedi, it's important to include the cost of maintaining any standards that you've set for your business. "I'm starting to understand that there are, of course, incidentals but also things that I want to try from time to time," he says. "In the first year, I decided to commit myself to changing my lamps before I'm required to. It would be very easy to go into a slow season with less revenue and just sit on the lamps that I have...In the slow season I've also committed myself to advertise but just in different ways. When everyone else is asleep it's a chance for me to gain market share.

"I think it's important to know your numbers but also know that, hey, I'm going to have enough cash on hand for incidentals and for things that you may want to try. I want to be able to shift on a dime to do those things. I don'twant to have my hands tied so I can't do anything and be forced not to be able to invest in the business because I didn't have enough money set aside or I didn't plan for it."

The point is, cash yields muscle. "It gives you much more power to have [cash] available to you because you can adjust, adapt and shift as you need to," says Trippiedi. "The business is constantly changing, it's always becoming more competitive, and you really need to have that cash on hand to help you make better decisions about things that will grow your business."

That's all well and good but is it really that simple? Trippiedi has had a very successful first year and is continually tweaking his numbers to maintain an accurate formula for his budget. His plan is straightforward: take only what he needs personally and no more, reinvest any excess in the business and revaluate after getting through the slow season.

"This is my livelihood, it's not a second job or a side business...Because I've maintained the business, I feel confident coming into a new season that I will be able to generate enough revenue to carry me through the slow season and then evaluate come the end of the year where we are at. Do we need to spend money on new equipment, etc.? And if there's money left over, at that point I'll enjoy it!"

PULLING IT TOGETHER

When all is said and done about cash management, accountants or not, Chevrier, firmly believes the key is experience. And this experience can only come from, checking the cash flow details, and modifying projections every month yourself. This doesn't have to be curnbersome, he says. In time, by setting up simple systems, the task should take no more than 10-20 minutes.

"Reading a book and doing it are two, different things...It's one thing to be told "Watch out for this' or 'watch out for that' but when you do the figures it's different. You see, 'oh, I have to tighten that up' or 'I have, to call that guy because I won't be able to make my payment next month.' I tend to say keep on with it. And as time goes on you will get so good at this that it takes no time. At first it will because you have to build your system."

And what happens if you allow the cash flow monster to fend for itself? "There is a frequently told story of the extremely successful businessman who went bankrupt because he did not collect his accounts receivables fast enough... Revenue is a concept like expenses. Cash receipts give you the money to disburse and to pay actual amount due. If you own a new, a fast growing or poorly financed business, you will go broke as surely as night follows day unless you follow the cash flow."

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