March 2010

MANAGING CASH FLOW

Are you suffering from too
little cash on hand?

Craig Brewster
Poor cash flow management is one of the major reasons businesses fail. Sometimes even otherwise healthy and profitable businesses fail because of this.

Cash flow is simply the movement of cash into and out of your company. It sounds simple, and it can be, but it takes some extra effort to keep track of it and to maximize your opportunities.

Why is it so important to manage your cash flow? Because you can't pay your bills with profits, it takes cash.

For example: if you if it costs you $50,000 to produce something and you sell it for $100,000 you have positive cash flow, right? Well no, you have a profit.

Say you bought the materials to produce this good in January for $20,000 and you finished producing it in March with a total labor cost of $30,000. Then you sell it in April for $100,000 on account to a good customer.

You owe your supplier $20,000 in January or possibly February if you have 30 day terms. You owe your employees $30,000 for their labor on a weekly or monthly basis. However, you are not getting paid the $100,000 from the sale until April or, if you have given 30 day terms, May.

The result is negative cash flow for the first four months of the year. You won't be able to pay your bills unless you are prepared and focused on managing your cash flow.

So how do you keep your cash flow and your business healthy?

Here are six cash flow maximizing moves:

1. Stay in the Know.

Know what is happening with your business and accept responsibility for managing your cash flow. This includes knowing your sales, your expenses, their timing, and their terms. It may also include learning the fundamentals of accounting. Forecast your sales and expenses and use them to make a cash flow projection. If you find a shortfall in your projection start managing it before it occurs.

2. Build A Backup Plan.

Establish cash reserves to cover your working capital needs. If your business is growing or is seasonal you may need to use financing tools such as lines of credit, accounts receivable factoring, or in more extreme cases get equity financing. The key is to complete your cash flow projections so you have the proper tools in place before you need them.

3. Rethink your Receivables.

Collect your receivables on time! This is very often overlooked, as the business owner generally wants to focus on doing what they are good at, which is more enjoyable than bill collecting.

It is important both to be careful who you extend credit to and to collect from them timely. Making personal reminder calls can be very effective. You may even consider offering discounts for paying early.

4. Clean Off the Shelves.

Manage your inventory carefully. This is a use of your precious cash. Buying too much, not enough, or the wrong type can lead to financial burdens. A lot of inventory ages quickly, loses value, and is expensive to replace. In addition, if you don't replace your inventory, you could lose customers to competition that has what they are looking to purchase.

5. Take Advantage of Terms.

Use your accounts payable period. If the terms of your purchase are 30 or 90 days then use that time to protect your cash flow, unless early payment comes with a discount that outweighs your improved cash position.

Of course, I am not telling you to pay late! Pay your bills on time and keep good relationships with your suppliers, but if they are giving you 30 days to pay the invoice, then take it.

6. Keep a Tight Purse.