By David Rosenfeld, CPA - Partner

Small business owners and executives are aware of the need to have a plan for their businesses.  These business plans allow the owner to think through how the business operates from lead generation to sales to production and delivery of their product/service to the customer.  One critical business issue that needs to be addressed in this plan, but is often forgotten - is cash flow.  A company's business plan may be perfect, but if the cash flow that results from the business practices of your industry (or your business) is not monitored and managed, resources may not be available when needed.

Cash flow is about the timing of how your business decisions impact your bank account.  Most companies must have facilities and employees before they generate any revenues.  Thus, start-up companies will have negative cash flows from operations before they begin generating revenues and profits.  Existing companies should plan to generate positive cash flows, or understand what decisions they can make to improve the business's cash flow.

What are the key factors in preparing your cash flow plan?

1.     How are your products sold? Does your customer make payment made at the time of purchase, or do you give your customers credit terms?  If you give terms, what percent of these customers pay within those terms, and what percent do you have to chase?

2.     How do you pay for your business inputs (salaries, inventory)?  Most companies have to pay salaries at about the same time as the employee provides their time.  Depending upon your credit rating (D&B reports), your vendors may provide some terms, such as net 30, which means you are supposed to pay them within 30 days.

3.     Do you have any loans that require regular payments?  Car loans, term loans, lines of credit or other types of credit provided to your company are examples of loans that require at least monthly payments.

Each of these elements of your cash flow can be impacted by the decisions you make.  Cash receipts can be improved by a number of decisions on your part.  You can offer discounts to your customers who pay early.  You can be more aggressive in your collection efforts working to minimize the size of your receivables that extend beyond the terms you have given your customers.  An additional option would be accepting credit card payments (if you have not already done so).  There are costs associated with credit card payments from your customers, so make sure you consider those added costs.

Cash disbursements should also be managed.  You will have very little flexibility on certain types of payments, such as salaries and related taxes, utilities and even rent.  There is some flexibility over payments to your vendors who provide you other items, including inventory.  Make sure that you are taking full advantage of the terms provided to you by these vendors.  If no discount is provided, use the full time frame they offer to you.  If necessary, you can delay these payments a little longer than agreed.  These vendor relationships are important, so you want to be thoughtful when you do this so as to not jeopardize these relationships.

Also, if you have loans with contractually required payments and you need some flexibility, you should sit down with your banker to determine what options are available to you.  If you have a good relationship with your bank, and you have been a good customer, it is possible the bank has some options available to you that can improve your cash flow - and maybe reduce your interest costs as well.

Implementing these cash flow practices should improve the cash flow of your business.  As experienced CFOs, Nperspective's team of professionals has worked with many companies that have required improved cash flow performance.  Through implementing the above practices, and improving the operating performance of these companies, we have enabled our clients to realize improved cash flow and improved the personal and professional job satisfaction.

Did you know that Nperspective CFO was recently engaged by a family owned growing manufacturer and distributor? The company let go of their full-time CFO to find a more cost effective solution given their current needs.  Nperspective CFO is assisting them on a part-time basis by training their accounting manager to perform higher level duties than before including closing the monthly financial statements, developing budgets and cash flow forecasting. Meanwhile, Nperspective CFO is handling their financing needs by handling communications and negotiations with their banks to get them the financing they need for future growth.