If You’ve Got The Money, Honey…

Posted on May 1, 2007 by LCT Staff - Also by this author

I can't stress the importance of cash management to limousine service owners enough. This is on my mind now because, just yesterday, I had a lengthy conversation on this subject with the owner of International Limousine Service in Washington, D.C., Richard Kane. Richard was born into this business and successfully operates nearly 130 vehicles. We’ve tapped him to speak on “growth” at both our International LCT Show and our east coast one — the LCT EASTERN CONFERENCE. I found his observations on how to really make money in this business fascinating. And guess what he underscored? The simple principal to wealth is exercising great cash flow management. Sounds easy, huh? It’s not!

Why are some of the biggest companies and most established operators financially tapped out? Because great cash flow management requires two essentials — ACCURATE sales projections and ACCURATE expense projects. I don’t know why it is, or what makes us do it, but businesses almost predictably overstate sales expectations (rose colored glasses perhaps?) and understate expenses (called “denial”). For whatever reason, most businesses operate on “best case” scenarios. Try the “worst case” basis and see if you improve your cash situation.

The basic concepts of cash management apply equally to all business types and I’m sure you fully understand the need for cash coming into your business ("cash inflows") to be sufficient to cover cash going out ("cash outflows"). When you set up your sales forecasts, if you have a sales team that submits their goals to you, try skewing them down by 10-15%. If you are selling your own service to your clients, just think conservatively. When you set up your expected expenses for the same period of time (and by the way, even if you do an annual sales/expense forecast, you can and should review it every three months) you should pad your overhead costs by 10-15%. This little trick that I learned from a business advisory has helped me “get real” with my own numbers and protect my cash flow situation more than once.

Controlling Overhead Own only the type and number of vehicles you need. Growth-oriented companies need to take a hard look at staffing. People are a huge expense and two things can drain you here. One, some employees are incapable of change and growth. This is a very emotional thing to deal with, but still, bring only those with you that are committed to the big goal and move swiftly on this. The other pitfall to avoid is over-staffing. Lean on outsourcing and consultants on a fixed-fee on a services rendered basis for as much as you can. Growing too fast can put a company right out of business! Your rent is an area that should be set at an acceptable level — initially set low (as in, your house) with a step-up-to-bigger plan that matches cash revenue as the business grows. Acquisition of vehicles and other office tools is another area where you can control the outflow of cash. Typically, some form of equipment financing is necessary, since paying all cash is not in the budget.

Financing Techniques For budgeting purposes, a fixed monthly payment is preferable to a floating rate loan (payments vary with changes in market interest rates). Tax deductions provided by financing result in tax savings, which is another source of cash inflow to the business. For example, equipment purchased with a bank loan will generate a tax deduction for only the interest portion of each monthly payment and a depreciation deduction based upon the equipment cost. Equipment financed with a capital lease will generate the same tax deductions as a loan.

An operating lease will provide monthly payments that are 100% tax deductible, resulting in a faster write-off of the equipment. Tax savings realized from deductions will increase the cash flow of the business. Therefore, evaluate financing alternatives on an after-tax basis. The effect of financing on your company's balance sheet is also a consideration. Vehicles purchased with a bank loan or capital lease will result in the equipment showing as an asset of the company with the loan or lease amount as a liability.

If you are trying to get a loan, note that lenders will look at your company's balance sheet to make sure that the loans in the current liability section of the balance sheet can be covered by (i.e. paid from) the company's cash inflow. Also, the amount of loans versus your equity must be reasonable, and total assets should be more than the company's total liabilities. Lenders will apply a cash coverage ratio (i.e. how many times cash inflow covers loans in the current liability section) when considering new financing requests.

Creating a positive cash flow is critical to the success of your chauffeured service. Capital budgeting and using proper cash management techniques are necessary to achieve this. As Richard Kane told me — and I think this is true, “There is a way to make great money at this game.” But as always, cash is king!

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