Cash Planning to Put More Money In Your Pocket

By: Zeb Smith, CPA, Ascent Business Financial Strategies

Woohoo! You did it! Another summer season in the books. Depending on the experiences you deliver and the country’s region with which you operate, your 2020 summer season was likely your best or worst season in your outfit’s history.

From state-imposed shutdowns to record setting outdoor recreation travel numbers, this year has been one wild ride.

What do you think is next? What are your predictions for 2021 and beyond?  Do you anticipate outdoor recreation & tourism to stay strong in the forthcoming years or do you think consumers will revert to their normal habits as soon as next year?

These are a few of the dinner table discussion topics taking place in my household as well as in virtual meetings with outfitters across the nation.

At this point all I can confidently say in preparing for our industry’s future is two-fold:

1. Time will tell 

2. Be intentional with your cash

Whether you are strapped for cash or managing a cash surplus, planning your cash flow is critical if you want to run a financially healthy operation both in the short-term and long-term. 

Some of the most common questions I hear from outfitters this time of year are:

• How much can I afford to invest in gear, equipment, boats, or outpost improvements?

• Should I keep cash-on-hand or pay-down debts?

• How much can I draw from the business to take a vacation, pay for home improvements, save for retirement, my child’s education, and more?

All these questions can be answered through cash planning. 

What is cash planning?

Cash planning is relatively simple as there are only three cash activities: operating, investing, and financing. Despite the simplicity behind cash planning, outfitters, like other small businesses, unknowingly mismanage or neglect one to two cash activities resulting in unnecessary stresses, overly expensive financing arrangements, and in the worst-case situations full shut down.

I recently wrote an e-book “How To Plan Cash Flows During The Shoulder Season” where I discuss cash flow at a deeper level and provide instructions, exercises, and other free resources to help you manage your cash when little to no money is collected from customers. I highly encourage you to download this free resource and implement these strategies within your outfit both in the short-term and long-term.

Cash should ‘flow’ between business activities as discussed in this article. Outfits who manage cash properly understand this and do it very well. If you ever need to ‘reverse the flow’ and are forced to seek financing to support your operating activities, then I suggest you engage professional help and not do it alone.

Operating Activities 

Operating activities include cash collected from customers and payments made to employees and vendors both during and between seasons. The net cash generated from these activities support all other functions within your business and is the lifeblood of a financially healthy outfit. It is imperative your outfit generate positive operating cash flow season-to-season and year-to-year.

The number one driver behind positive operating cash flow is Net Profit.

Look at your outfit’s profit and loss report. The number at the bottom of this report is your Net Profit. If you record depreciation and amortization expenses throughout the year, then add-back these expenses to the reported Net Profit number. The result is your cash generated through operating activities.

If you want to better understand the components of Net Profit and discover additional ways to improve operating cash flows, then download my e-book “13 Key Metrics To Grow A Profitable Adventure Business.”

Pre-payments: one way to drum up operating cash during the shoulder season

If you are strapped for cash or do not have enough in reserves to pay for a delayed season start date, one tactic to generate operating cash during the shoulder season is to collect customer pre-payments in advance of future trips. If you decide to do this, then I suggest you revisit your sales agreement and review your pre-payment terms.

Make pre-payments either non-refundable or partially refundable. Set aside any amounts that could be refunded in a separate bank account and use the non-refundable portion to carry operations until season starts. Consult with an attorney to make sure your refund policy is in-compliance with you state laws. Now start selling those trips!

Investing Activities

Investing activities include cash generated and used from the respective sale and purchase of long-term assets. Investing activities include two subcategories:

• Capital assets such as boats, vehicles, equipment, and land improvements.  

• Securities and other liquid investments such as stocks, bonds, equities, and CDs.

Outfitters generally spend more money on purchasing capital assets that drive operating cash flows than they do in other investments. There are several reasons for this from the “I need to re-invest my profits to grow” mindset by the startup outfitter to the more established outfitter who purchases these investments personally and leases the asset’s use to the business which better protects their financial investment from lawsuits or other potential losses.

In both situations, there are a couple ‘rules of thumb’ you need to know when considering cash flows from investing activities.

Build a reserve

Despite your urge to buy new equipment between seasons, you must first build a solid cash reserve for any ‘oh shit’ moments. You need to have enough cash on hand to survive the unexpected bad weather season, unfavorable government changes, unavoidable global pandemics, and any other external factors outside your control.

Look at your situation and evaluate your need for reserves accordingly. Consider your reliance on niche customers, key vendors, and regional factors.

I have seen outfitters set aside amounts from as little as one month to one year’s worth of operating cash. Any amount is better than no amount. So, start saving.

Invest your reserve in a CD or money market fund with little to no penalty for early withdrawal.

Purchase long-term assets

Outfitters love buying equipment. I mean… who does not enjoy new vehicles and top-of-the-line gear to keep your guides and customers safe?

When you buy these assets consider the expected life of each and match-up financing accordingly.

• If the asset only lasts one year or less, then use cash.

• If the asset is equipment or vehicles that should last three to five years, then consider a short-term loan with a zero to 6% interest rate.

• If the asset is land or land improvements, then consider a long-term mortgage or purchase the asset personally and lease it to the business.

For any asset, whether it be a one-year raft or a five-year vehicle, you should understand how much profit that particular asset generates year-by-year. Knowing this will help you match-up the best financing and leasing arrangements. 

Generating cash by selling assets

Cash can be generated by selling assets. Ideally this only happens when an asset has met the end of its useful life and you can salvage some extra cash by selling it.

Sometimes you will need to sell assets because of unfavorable circumstances. Evaluate your broader business plan and sell the least useful assets first. Give yourself as much time as possible to sell each asset and get as much money out of it as you can. Make sure each asset’s sale price is more than any outstanding debts attached to that asset and retain the extra cash for operations or whatever else you need it for.

Financing Activities 

Financing activities include cash raised and paid to lenders and owners.

In a perfect world loans are only needed for the initial purchase of the business and to purchase capital assets. The owner makes a single investment at the onset of her business and net operating cash flow pays-down the debts, reimburses her for her investment, and pays her dividends for the risks assumed when owning a business.

When an outfit struggles to generate net operating cash flow and maintain appropriate cash reserves, funding is often sought from owners or third parties.

When an outfit needs additional short-term cash my first suggestion is for owners to consider infusing the outfit with personal funds. Initiate a single cash transfer from your personal bank account to the business bank account equal to the amount of cash the outfit needs. For most outfitters this is preferred over other financing options.

You can also restructure your business to bring on partners or sell shares to investors. If you go this route, I encourage you hire an attorney and an accountant to ensure your agreements are legal, affordable, and in-line with your personal and long-term business goals.

If owner financing is not an option, then consider taking on debt. The tours and activities industry as a whole is a risky investment from a banker’s perspective. Banks often require lots of historical reports and more collateral when issuing loans to outfitters compared to other industries. Outfitters are often forced to take on high-interest loans or use credit cards and expensive lines of credit to float operations through shoulder seasons. Both are very nasty habits and cost outfitters big time.

Before you seek external financing evaluate your long-term plans, look for small and targeted changes to operations that will boost net profits and improve net operating cash flows, and consider infusing the business with personal funds.

In Summary

Operating, investing, and financing are your outfit’s three cash flow activities. Each activity serves a purpose in your operations and can be leveraged to reduce your stresses and put more money in your pocket.

To properly plan your cash flows, look at your current cash position and:

1. Evaluate your short-term operating net cash flows.

2. Set aside an operating reserve appropriate for your outfit.

3. Put to action a plan to maintain or improve net operating cash flows.

4. Sell all assets that do not generate net operating cash flows.

5. Invest in assets that do.

6. Pay-down debts.

7. Consider financing in-line with your goals.

About the Author

I invite you to shoot me a direct message at zeb@ascentunlimited.com with any questions or to start the discussion on ways we can quickly grow your outfit’s cash balances and ultimately achieve your business goals.

If you want more targeted information as well as instructions, exercises, and other free resources to help improve your cash flows, then download my free e-book “How To Plan Cash Flows During The Shoulder Season.” You may also be interested in my online course and cash planning services at ascentunlimited.com/cash-flow.

Get outside, have some fun, and enjoy your fall season!

Zeb Smith, CPA

Ascent Business Financial Strategies