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We all recognize the challenges of running a business successfully — delivering high-quality products and services, getting the work done on time, staying a step ahead of the competition. But sometimes we overlook some of the basics, like making sure there is enough money in our accounts to meet our financial obligations. Even when revenue exceeds income for the month, the quarter, or whatever accounting period we're considering, there can be times within that cycle that the business can be squeezed for cash.

In this newsletter, associate Chris Todd offers suggestions for better managing your cash flow. His advice is essential to managers of struggling businesses, but the concepts he describes can also help those who are doing well stretch their dollars a little more.

We hope you find these ideas helpful, and we encourage you to forward this newsletter to anyone you think might find this information valuable.

As always, your comments are welcome, and we look forward to hearing from you.

Sincerely,
Tom Beane
President CMC CIRA

Do a cash reconciliation to find out how much money your business really has.

Contact your customers and encourage them to pay more quickly.

Slow down making payments as much as possible, but make sure your creditors are aware of your situation.

Look for other possible sources of cash within the business: inventory, excess equipment and insurance policies, for example.

If you are in good standing with your bank, secure a line of credit or ask for a larger line. It's easier to secure credit when you're doing well than when you're doing poorly.

When a business is struggling with its cash flow, the solution comes down to four simple words: Collect faster, pay slower.

It's a lot easier to make a solution sound simple than it is to carry it out. But it is possible, provided the business recognizes its financial situation and has a clear understanding of the strategies and tactics it must employ.

I'm writing from the perspective of a professional who deals regularly with troubled businesses, but companies that are not struggling now may also be able to benefit as well by adopting some of the ideas mentioned here.

The first step in the process is to do a cash reconciliation — figuring out how much money the business really has, including items that aren't showing up on bank statements. As we dig into the numbers, we also generate two other metrics: DSO, for days sales outstanding, which measures how long it takes the business to collect its receivables, and DPO, for days payables outstanding, which measures how long the company takes to make payments on its invoices.

Standards for DSO and DPO vary by industry, so the findings can help benchmark how well the business fares in comparison with its peers. More importantly, these measurements provide a good starting point for evaluating a company's overall situation. If payments are being made faster than collections, the business could find itself tight on cash, even if its projected income exceeds actual expenses.

By analyzing DSO and DPO we can begin looking for opportunities to improve the company's cash flow. It's not unusual to find procedural weaknesses that are contributing to the problems.

Let's look at the sales side first.

If cash is sitting with the company's customers for too long, the first step is to implement procedures to encourage them to pay more quickly.

For example, if payment on an invoice is due 30 days after it is issued, it is a good practice to call the customer after a week or 10 days, verify that the invoice was received, make sure that they have no questions about it and ask for confirmation that it will be paid by the due date. If no questions are raised, contact the customer again about a week before the payment is due to verify that it will be paid on time.

There's no need to worry about your diligence upsetting the customer. After all, you are only verifying that the customer will make payment according to terms to which he has already agreed. READ MORE

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Situation: The secured lender requested Beane Associates oversee liquidation of the distributor's assets through auction and directly manage recovery of receivables.

Result: Beane Associates conducted a thorough analysis and directly managed the collection of receivables so that it exceeded the creditor's initial expectations for recovery.

Situation: Despite positive returns to the bottom line, a leveraged buyout of a former owner left a 60-year-old manufacturer of high-end glass cutting and cleaning equipment with a hefty debt service commitment and no cash.

Result: Beane Associates immediately identified the cash drain and minimized the leakage while developing a rolling cash flow model that enabled the company to navigate through the uncertainty surrounding future cash inflows. Beane Associates reviewed the company's sales and marketing plan and made specific recommendations that led to an overhaul of the sales department, including how leads are tracked through closing. Beane Associates also counseled ownership through two forbearance agreements and a lender relationship made difficult by the company's financial distress, which was ultimately alleviated by a refinancing and a commercial real estate sale.

Situation: Beane Associates was retained by the secured creditor to prepare a liquidation analysis on a long-established commercial printer and media company that boasted an extensive list of noteworthy newspaper customers.

Result: Due to uncommon recording practices within the borrower's process of recording transactions, Beane Associates was unable to establish satisfactory quantities of inventory in order to make an accurate assessment of its value. The findings served as justification for the secured creditor to accept a discount on existing debt when a bridge lender opportunity arose.