7 Cash Flow management tips for Small Biz Owners

“If I had to run a company on only three measures, those measures would be Customer Satisfaction, Employee Satisfaction & Cash Flow. Jack Welch, former CEO, General Electric

Cash Flow Topics: Anticipate, Love Lenders, Train Customers, Max In-Flow, Min Out-Go, Fix it, Barter.

Small business owners contend with a host of problems every day – producing products or services cost-effectively, increasing sales, satisfying unhappy customers, and motivating disgruntled employees – and they quickly learn that most of these problems can be solved with good Cash Flow.

Cash Flow is the life-blood of an organization, it’s the means to pay salaries, buy supplies, & make investments in infra-structure. Owners who cannot efficiently manage their business Cash Flow are almost certain to fail. Those who can are able to improve nearly every aspect of their business.

Tips to Improve Cash Flow. Converting sales into cash as quickly as possible, while reducing & extending your payments to build a “cash cushion”, is the basis for long-term, sustained growth, whether your company is just starting or has grown considerably. Implementing some or all of the following suggestions can help boost your CF as CFO

Anticipate Future Needs. Avoid surprises. There is nothing more difficult or dis-heartening than searching for cash when you’re desperate. To start, keep accurate, timely Accounting records – as they are essential to understanding your business’s financial standing. Use your past Monthly Income & Cash Flow statements as well as your Balance Ssheet to calculate available cash and project likely results for the next 3-6 months. These pro-forma statements can help alert you in advance of any shortfalls, giving you time to prepare for them.
Build Connections with Lenders. The odds of being able to borrow cash or entice investors to put more money in your company when you absolutely need it are low. Bankers are least interested in lending to a company in desperate straits since their first objective is to be paid back. Build connections in the financial community “before” you need its help, not “when” you need it, and you may be able to secure a commitment of future loans. Bankers generally make secured loans on such assets as the following:

Accounts Receivable. Typically established as a revolving line based upon a percentage (60% to 80%) of total accounts receivable (AR) due within a 60 to 90 day period, accounts receivable financing is one of the most common corporate loans. The balance due moves up and down as AR varies: When sales and AR increase, the bank advances more cash on the line, when sales and AR decrease, you are expected to make a payment to bring the loan in line with the negotiated loan-to-AR ratio.
Inventory. Lenders generally like Inventory as it is expected to be sold and turned into cash. Bankers generally prefer finished or raw inventory since it is most marketable in the event of default. Many do not lend on in-process inventory as additional investment is required before it can be sold. Like an AR loan, an Inventory loan moves up & down as inventory levels change. A typical ratio of loan to inventory is 50%.
Equipment. While technically not a short-term loan, owned equipment in good condition can secure a fixed-term loan for a single shot of cash in an emergency. Remember, however, that the more specialized the equipment, the lower loan-to-value ratio you may receive. If you have old or excess equipment that is marketable, sell it for cash – having extra cash is more valuable than an idle asset.

Factoring – Selling Accounts Receivable to a third party rather than borrow on them. Specific terms are negotiated between the third party, or “factor,” and the company, including the ratio of value paid for each invoice, whether the sale is “recourse” or “non-recourse,” and any fees which might be paid to establish & maintain the relationship between company & factorer. The advantage for a company – especially if it is newly established or has weak credit – is that the factor looks first to the “credit worthiness” of the customer who owes the money, rather than the company which sells the AR.

3. Keep your Cash Working. Keep your cash balances in interest-earning accounts, which are available at most banks. In some cases, you might encounter a minimum balance requirement. However, since interest rates on these accounts are often lower than those of savings accounts, certificates of deposit (CDs), or money market accounts, consider keeping the bulk of your funds in higher-paying accounts, then transferring funds to meet the minimum balance requirement in your interest-bearing Checking account (plus the total payments due that week or month). Avoid long-term CDs, which lock you in for a specific period of time, since redeeming them early may cost you interest. Either invest in penalty-free certificates or that portion of funds which you are not likely to need during the life of the CD.

4. Separate Payroll Account should be set up on establish a “bi-monthly” cycle. Require your employees to take direct deposits to reduce the costs of writing & delivering checks. Finally, transfer Payroll funds immediately before payment to keep your cash earning interest

5. Train Your Customers. As a small business owner, your goal is to collect payment for your services or products before or shortly after incurring the expense of producing or delivering them. The optimal outcome is to receive payment on delivery (COD), but that is not always possible. Invoice your customers the day you deliver your product with the notation that “payment is expected on invoice receipt.” Don’t suggest that waiting until the end of the month is an option. Include a notification that interest is charged for all payments later than 15 or 30 days. Also, stay on top of your AR Aging – a report categorizing AR according to the length of time invoices have been outstanding – with an established process for following up with late or delinquent payers:

· An initial form letter 10 days following receipt asking for payment.

· A second follow-up letter – more aggressive – in 20 days demanding payment.

· A third letter in 30 days and a phone call from your Collections Clerk seeking payment.

It is important to have early contact with potential delinquent payers and to offer a variety of options for payment – if they have difficulties. These options might include a Credit Card charge or a Payment plan. Be careful about instituting a policy of discounts for early payment since big customers are likely to delay and take the discount at the same time. Remember, a customer who doesn’t pay isn’t really a good customer, but an expense. Determine how you want to handle late or non-pays before they arise. Document your decision as a policy, and stick with it.

6. Work with your Suppliers. Just as you want customers to pay you, your Suppliers want payment as soon as possible. However, early payment to Suppliers can hurt your Cash Flow and should be avoided if possible. Delay payment as long as you can, while remaining consistent with the terms of the sale. If there is no penalty for late payments, set a pay cycle of 45 to 60 days from receipt of an invoice. While slowing the “outflow” of cash is important, it is equally important to maintain a good credit rating and cordial relations with critical Suppliers. If you are forced to delay payments, contact the Supplier as soon as possible, with an explanation and a plan to become current on your debt.

7. Maximize Cash Inflows. There are a number of methods to increase Cash Flow – especially if you sell custom products or engage in extended contracts. Require Security Deposits up to 50% of the order, if the product or service is unusually large, complex, or one of a kind. If you work with contracts, set up payment schedules & amounts that parallel or exceed your already incurred costs. If your customer demands modification of standard products or services that have not been identified in your contract, seek additional payment through fees or change Orders.

· Subscription Sales. Small businesses which provide a regular service or product should consider Subscription Sales whereby customers pre-pay. Newspapers, magazines, Cable TV, landscaping, & pool maintenance are examples of products and services which lend themselves to a “subscription” model. In addition to receiving up-front cash to cover future costs, you have the advantages of securing future sales + easier resource & production scheduling. As another option . . .

· Layaway Programs have come back in vogue as an alternative to sale & payment plans. A layaway program allows customers to select a specific product, which is then reserved for a future purchase and delivery when payment has been completed. This allows the seller to have use of the cash prior to incurring the product’s cost.

Bonus 8. Shrink Cash Out-flows. The combination of cutting or avoiding expenses overall + delaying payment as long as possible, reduces demands on cash. Strategies to reduce cost include the following:

· Repair Capital Equipment, Don’t Replace It. Save money by having a regular Maintenance program, using re-conditioned replacement parts from third-party suppliers (rather than factory parts), and contracting with a local repair facility to handle jobs too big or complex for in-house personnel.

· Buy Used Equipment, in good condition is generally just as good as new. Search local availability in your area – specifically looking for companies whose assets have been “fore-closed” and are being sold by a lender. You may be able to buy quality used equipment for savings up to 80% without a comparable degradation of capability.

· Delay Product Upgrades until Absolutely Necessary. Consider open-source SW, which is generally free or available for a small donation.

· Barter Products for Supplies & Services. Suppliers who are also Customers might be interested in a “trade” – whereby each company receives all or a portion of its respective payments in the form of finished products. Since the exchange value is usually set at each company’s respective retail price, a Barter agreement effectively provides a “discount” equal to the net profit margin on your product and allows you to maintain cash that would otherwise be used.

Final Thoughts. Small business owners usually learn two principles early in the life of their companies. “Cash is King” refers to the importance of cash in any company, and the Golden Rule – “He who has the gold makes the rules” – the validity of which is apparent to anyone who’s gone hat-in-hand to a lender. Building and keeping an adequate reserve of cash provides maximum opportunity & flexibility to any business, while enabling its owners to sleep soundly at night.

Comments: Any other ways to maximize Cash Flow?

from Bill Blog (not a person) 9/17 enhanced by Peter/CXO Wiz4biz

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