The Big Short. Get Shorty. Best short film. Favorite short stories.
Short can be a good thing. But one place where you don’t want to be short is in cash flow. Insufficient cash flow and poor planning can wreak havoc with payroll, force you to access expensive debt, and cause you anxiety and (long) sleepless nights. When you’re proactive about budgeting and AR/AP, you can avoid getting caught in the short trap.
The all-important cash conversion cycle
When it comes to running a cash-positive entertainment business, you want to be quick and proactive. Your company’s cash flow cycle (or cash conversion cycle) is the time that goes by between payments you make (payables) and fees you receive (receivables). In other words, it’s how long it takes you to receive corresponding revenue — after purchasing cameras and other equipment, paying your producers and other contractors, running your payroll, paying your rent, and the like.
When that time period is lengthy, chances are you’ll come up short. You may be forced to take out short-term loans and cut back on crucial spending (even skipping your own salary check, which isn’t a great practice). You’ll almost surely find yourself, or your AR department, chasing down your payments, which is inefficient.
That’s why one secret to sustaining or growing your company — and staying sane in the process — lies in effectively managing your cash flow cycle.
If you’re waiting to invoice, you’re taking an unnecessary financial risk. All the sales in the world won’t do you any good unless you collect on them. We’ve all heard of businesses that have gone bankrupt with millions of dollars worth of sales “on the books” (all uncollected, of course).
More advantageous methods involve invoicing on the day of delivery, or even invoicing prior to shipment. For some, an effective option is to invoice for a percentage up front — and bill for the rest upon shipment or delivery.
If a complicated invoicing process is slowing you down and bringing you up short on cash flow, the answer is simple. That’s right, simplify the process. Your solution may be to switch your invoicing software or make a staff adjustment. Your business may have grown to the point where you need a higher level system and/or a dedicated person to stay on top of AR and AP.
Use credit lines to your advantage
If you have a good credit rating or collateral (say hard assets like a building or equipment), a bank line of credit can actually work in your favor and help you manage your cash conversion cycle. Unlike a loan, with a line of credit, you only take what you need when you need it, and only pay interest on the outstanding balance.
Depending on your company’s risk level (start-ups are more risky, long-established companies less so), the rate may only be a few percentage points above Prime. Even though credit rates have inched up over the past year or so, rates are still at historic lows. And credit line rates are much better than credit card rates or other forms of credit.
Where you get credit is ultra important. You want to avoid predatory debt– the interest rates can be crushing for small and medium-sized businesses. But debt from a reputable lender can serve as leverage to help a company grow faster and take advantage of opportunities.
It’s a best practice to set up a line of credit in advance and when business is good. This gives you the opportunity to shop rates and credit terms. It also means you can access cash as soon as you need it.
Cut costs and defer payments
Accounts receivable isn’t the only area that will improve your cash flow. You also want to analyze your company’s accounts payable. Cut costs like a surgeon — be strategic, precise, and objective. Depending on your cash inflow cycle, you may need to access your bank line of credit, or negotiate deferred payments with vendors and suppliers. You may incur some credit charges, but it may be preferable to damaging valuable relations.
If you have a solid invoicing process in place but are still coming up short, the problem may be with pricing. Does the price of your product or service reflect corresponding overhead fees and labor? If not, you may want to reevaluate your pricing structure.
You may worry a pricing increase will lead to less sales. That is a valid concern. We recommend understanding all of your fixed and variable costs and upcoming major expenses (such as capital expenses). Next, perform industry research to reach your pricing sweet spot.
Finally, consider that raising prices can actually increase sales. Customers often equate a higher price with higher value — and act accordingly.
The long and short of it
The long-term survival of your company depends on managing cash flow and avoiding cash shortages. When you’re proactive about invoicing, pricing, accounts aging, and containing costs, you can reel in cash more quickly. When you use credit lines strategically, you can successfully weather the ebb and flow of AR and AP, and avail yourself of opportunities. Healthy cash flow lets you trade in sleepless nights for sustainable growth and operations.
Need a specialist who understands the intricates of the entertainment world and the hard facts of finance? Judd Financial specializes in providing CFO services including accounting, cash management, and financial analysis for entertainment companies. Don’t get caught short. Contact us today for more info.