When small businesses experience rapid growth, they usually encounter the cash float problem. This problem is a mathematical rational reality that is easy to understand, but still punches you in the gut. You're at a growing profitable company - you're a winner - except that your company is out of cash all the time and barely escaping bankruptcy. How is this possible?

The Cash Float Dilemma
If your company is in a position where you must pay to create something before you sell it, and your customer pays you a month or so later, then you have at least a month (but usually more) where you have spent money that you aren't getting back. This is called "cash float or simply "float. If your business is in a steady state (i.e. not growing much), your float will be equal to about two or three months of income. For example, if your company makes $120,000 each year ($10,000 per month), the float is probably $20,000 to $30,000. If your revenue is $1.2 million, your float is $200,000 or more. If your revenue is $12 million, your float is $2 million or more.

As your company becomes more successful and sales increase from $240,000 to $1.2 million per year, your float also increases from $40,000+ to $200,000+. Unfortunately, that money has to come from somewhere. Part of it will hopefully come from profit, but unless your profits are obscenely high, they are probably insufficient to enable the level of growth you are experiencing.

You may have heard well-meaning people say that this is a "nice problem to have," but if it causes you to go bankrupt, then it really isn't. It's nice that you're growing, of course, but you still have a thirst for cash that is worth lessening if possible.

Here are some effective methods for dealing with the cash float problem.

1. Investors and Lenders
One great way to generate cash is to take out a loan (factoring loans too) or sell stock, options, or warrants to investors of various flavors. Selling stock to investors is beyond the scope of this article, and getting a loan is generally well understood. Factoring is the process of selling your company's accounts receivable at a discount. It is a very popular way for small companies to borrow money. My company, Journyx, used this method back in the beginning. We would invoice a customer, send the invoice to the bank, and receive 80% of the money once they had verified the invoice with the customer. Unfortunately, this was difficult for us because we had many invoices that were small, and the bank was reluctant to call customers about invoices below a certain amount. One benefit, however, was that customers occasionally told the lender important things that they had not told us. We were able to learn more about our customers that way.

2. Invoicing Practices
A great way to reduce cash float is to decrease your A/R days-to-collect, which is the average number of days it takes to collect your accounts receivable.
Michael Dell is well-known for having achieved a negative A/R days-to-collect by outsourcing just about everything (for an added level or recursion, he even outsources the task of figuring out how to outsource people), getting money from customers before he built their computers, and paying his vendors notoriously slowly - typically after 90 days or more.

Dell used these ideas to create a negative float, enabling him to grow much faster than his competitors. He was able to do it through having an online store, customers who were willing to buy direct on the web, and vendors who allowed him to pay them very slowly (essentially lending him money interest-free). The business engine that Michael created was an unstoppable powerhouse of growth for Dell for many years, propelling the company to the top in profitability, growth and most of the other metrics that influence the financial performance of any business.

If you have a consultancy, you probably can't get away with having your customers pay in advance and waiting until you're good and ready to pay your employees. You can, however, automate employee time collection and import the data into QuickBooks (or your favorite accounting system), which will get those several hundred thousand dollars worth of paper timesheets off of your floor. This will reduce your float from about three months to two, so if your average monthly sales are $100,000, you now have $100,000 for growing your business that you didn't have before.

One of our customers is an environmental consulting firm, and Becky, their CEO, came to me a few years ago with a problem. "What's the problem?" I asked.

"We're growing really fast, from 40 to 300 people in just a few months. I mean, business is just incredible!"

"Okay. That doesn't sound like a problem to me. That sounds like a really good thing. I wish my business was doing that. What's the problem?"

"Well, I can't find the time to get the bills sent out to our customers. I'm looking at a giant stack of paper timesheets on the floor in the corner of my office that represents like $500,000 or something. Help!"

So we helped.

By putting an automated timesheet and travel expense management system in place, Becky was able to drastically increase the speed of billing, which lowered her cash float and provided money for the business. Accuracy also increased, leading to fewer situations where customers were rejecting inaccurate invoices, which lowers A/R days-to-collect further. Furthermore, automating time collection made it possible to invoice in smaller increments more frequently, and since small bills tend to get paid more quickly, this improved the cash situation even further.

As a human resources professional, you are most likely responsible for at least some degree of employee orientation and training. It will therefore fall to you to explain to new employees that those who are involved in the process of billing clients for services work must track their time accurately and in a timely fashion.

3. Incentives for Faster Payment
Standard terms can help you persuade your customers to pay more quickly. If you put the phrase "1% 10 net 30" on your invoices, your customers' accounts payable clerks understand that you will give them a 1% discount if they pay in 10 days, but that payment is ultimately due in 30 days. Some companies have policies that force them to take all discounts, and this may be true of your customers. When I worked for a consulting firm that sold services to IBM, we labeled all of our invoices this way. Since IBM represented 90% of our business, our average A/R days-to-collect was 10 days. Sound hard to believe?

"1% 10 net 30 are common terms, as are "1% 15 net 45. If you have a customer that is really difficult about paying on time, try "5% 15 net 30. 5% is a rather large discount and if he doesn't take it, then either he's broke or didn't like your service. Either way, you know something that you didn't know before.

You can also include penalty terms in your contracts and on your invoice. You may not necessarily enforce them, but they will have an effect. Many companies sort their vendor payment schedules by penalty amounts, and this is the way to get to the top of their list.

If you have a particular customer that is always paying you slowly, indicate on the invoice that there will be a 1% surcharge on all invoices paid over 30 days late. Or 2%. Or 5%. You don't ever have to press the issue, but maybe the threat of a surcharge is all those customers need to pay up!

4. Simple Tips
Lock boxes are a great way to shave a few days off of your A/R days-to-collect. Instead of having payment sent to your office, customers can send it directly to the bank, where it is deposited into your account. The bank then emails you an PDF file containing the image of the check for your records. This process can save you about three days of collection time.

Likewise, if your customer is willing to receive invoices via email, you can eliminate the need for labor-intensive activities such as printing, stamping and mailing, as well as postal delivery time. This one is worth five days at least.

Believe it or not, every day counts. If your A/R days-to-collect is 30 days and your average monthly sales are $30,000 each month, that adds up to $1,000 a day. Take just three days off of that number through lock box and you have put $3,000 in your pocket. The five days you save with email invoices gives you $5,000.

HR Professionals can also help reduce cash float by paying employees in arrears, e.g. one or two weeks after the pay period. Not only does this simplify payroll (there are fewer corrections due to unsubmitted timesheets), but it also provides what is essentially an interest-free 'loan' from the employee to the company, which makes the float problem a little less severe.

Happy Invoicing!