Cash flow—how much money is flowing into and out of your home-based travel agency—is an easy concept to understand. Still, you may not be fully aware of the impact that well-managed cash flow has on your bottom line. That's probably because the importance of cash flow is much easier to recognize in some types of businesses than it is in others.
Take home building, for example. When a builder takes on hundreds of thousands of dollars in short-term debt in order to build some new homes, it's obvious that he or she must generate substantial positive cash flow in a hurry if the business is to survive.
The situation for the typical home-based travel agent is not that dramatic of course, but generating and managing cash flow is critically important in even the smallest home-based business. Losing control of money has put more entrepreneurs out of business than temporary red figures on the bottom line. On the other hand, a sensible cash management system can provide a life-sustaining cushion during those inevitable slow times when the phone just isn't ringing as often as you'd like.
Here are nine powerful techniques for improving cash flow and profits in your agency right now:
1. Never allow any of your money to lie idle.
If you don't already have one, open a money market account at your bank and have it linked to your business checking account to allow for telephone or online transfers. From that point on, deposit all of your daily receipts into the money market account where they will immediately start drawing interest. "Putting this step to work in your cash management system now will pay permanent dividends in your future business operations," says Rob Vito, Adjunct Professor of Entrepreneurship, Penn State University.
Never deposit receipts directly into your checking account. Keep a minimum balance in the checking account and transfer cash by phone or online only as needed to cover checks written. "Modern technology has made telephone and online money transfers so quick and easy that you can't afford to pass up this profit-enhancing technique," says Vito.
Worst money sin of all: leaving checks or cash lying around in a desk drawer until you can get to the bank. Using every cent of your money to make money is the mark of a skilled money manager.
2. Don't be timid about using other people's money.
We've all heard stories about entrepreneurs who have built large business empires without ever borrowing a cent, but they are the rare exceptions.
"At today's relatively low interest rates, careful use of credit can be one of your most effective business-building tools," says Thomas Normoyle, CPA, Huntingdon Valley, PA.
Personally, I've never been comfortable with extensive use of credit for personal affairs. When it comes to business, though, it's a different matter. To begin with, the costs of borrowing are legitimate tax deductions for businesses. It makes more sense to spread out the cost of capital purchases than to put stress on your cash flow by laying out large amounts of cash that you could put to productive business use. "Credit, when used in a sensible and controlled manner, can be a powerful profit enhancer," says Vito.
3. Don't be in a big hurry to pay your bills.
There's good reason why checks are slow to come in from people who owe you money: Hanging on to your cash as long as possible keeps that money available to draw interest or to work in your business.
Take the time to set up a system that provides for paying bills only when they are due. It's easy to do and is another rung on the ladder of professional cash management.
Important: Don't go overboard and jeopardize your credit standing by paying bills late. Pay your bills when they are due—not before, not after.
And, keep an eye on the state of postal deliveries during this uncertain time. If it appears that deliveries may be delayed, avoid those oppressive late-payment fees by allowing a little extra time.
4. Be aggressive about collecting accounts receivable.
If you do any of your own billing, it's important not to allow those receivables to go untended. You've earned that money; you have a right to it; you need it. If your clients learn that you are cavalier about money owed to you, you can be certain they will stretch your patience (and your cash flow) to the limit.
Vito recommends that your invoices include a late payment penalty of 1.25 percent per month if the invoice isn't paid within 30 days.
5. Consider leasing.
Leasing products like cars or vans for personal use is generally not economically advantageous. Most accountants agree that leasing is the most expensive way to maintain a car exclusively for personal use. But the rules change for business.
"The nature of business accounting is such that leasing can be the most sensible approach to many types of capital investments, including vehicles," says Normoyle. "It usually makes sense to lease if you will be able to use the cash in your business or in your investments to earn a better return than the cost of leasing."
Talk to your tax advisor about this the next time you're considering any purchase of capital equipment that might be available on a lease basis.
6. Maintain a cash cushion.
"Whenever possible, keep enough business cash in interest-bearing accounts to cover normal operating expenses for three to six months," says Normoyle.
There is nothing like the peace of mind and self-confidence that comes when you don't have to sweat out next month's rent or utility bills during a slow spell. Also, keep in mind that your cushion money is making money for you in those interest-bearing accounts.
7. Develop a personal relationship with your banker.
Handling money is a banker's job, and most are very good at it. Even if your home-based agency is tiny, it's a good idea to have a personal relationship at the bank where you do business. Discuss your financial picture honestly with the manager of your local branch. You'll get some good ideas and a favorable ear should you ever need a little financial help.
8. Let your computer help you manage your cash flow.
Whether your operation is large enough to make use of a heavyweight commercial software package, or whether you use Quicken or Money on a desktop PC, trust every financial aspect of your business, as well as personal investments, to your computer. The financial reports and analyses that modern software can produce at the touch of a button are now critically important tools for improving cash flow and bottom-line profits.
All of the popular software packages designed for small business and personal finance are infinitely easier to use than they were as recently as a couple of years ago. More important, they will teach you in dramatic fashion how much you can benefit from a sensible cash management system.
9. Spread the Gospel
To manage cash, you must have a steady flow of the stuff coming in. Many travel agents keep so busy dealing with day-to-day problems that they never get around to putting together a business-building marketing program. That's a serious mistake. Marketing is an essential ingredient in the recipe for growth—even survival—of any business, large or small. Yet, many owners shy away from all but the most obvious ways to promote their businesses. For some, their entire marketing program consists of a web site or an expensive ad in the Yellow Pages. Sometime, someplace, someone may have bought the necessary equipment, placed an ad in the Yellow Pages, and sat back while the phone rang off the hook and the money poured in. Maybe, but not likely.
Building a growing and profitable travel agency requires an ongoing marketing program. There is no other way. Extensive travel experience alone won't do it. A high degree of professional skill alone won't do it. As one entrepreneur puts it, "You have to tell the world your story. If you don't do it, no one else will."
Taken individually, good cash management techniques may seem inconsequential. However, when you blend them together in a consistent manner, they will become a significant and permanent contributor to your bottom line.