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A Cash Flow Survival Guide For Small Businesses

The old cliché Cash is King is a timeless doctrine that drives the successful financial management of any growing small business. The lag time between when you pay your suppliers and employees and when you collect from your customers is the problem; cash flow management is the solution.  The essence of cash flow management involves delaying outlays of cash as long as possible while encouraging anyone who owes you money to pay it as rapidly as possible.  The process is ongoing and permeates every aspect of your business from juggling such tasks as staying on top of accounts receivable, to extending lines of credit, to managing inventory, not to mention satisfying suppliers and vendors in due course.  So let’s explore some cash flow management techniques that will enable you to survive your business terrain travails.

  1. Measuring Cash Flow

A cash flow projection is a vital tool that can be in the form of a rather simple excel spreadsheet that will enable you to oversee the cash ins and outs of your business.  While an accurate cash flow projection can alert you to impending trouble, it is not a crystal ball.  It is merely an educated guess that requires constant monitoring and is dependent on a number of factors such as your customers’ payment histories, the accuracy of your assumptions and your vendors’ patience.  While such expenditures as loan and lease payments and payroll may be relatively fixed in nature, beware of assuming that customers will continue to pay at the same rate as they have done in the past, that payables can be extended as far as they historically have, that you have properly forecasted the timing and amount of expenditures such as capital improvements and that you have accounted for seasonal sales fluctuations.

  1. Improve your Receivable Turnover

The faster your receivables turn over, the more capital you’ll have to spend on growing your business.  Your accounting firm or software should have the ability to age your receivables into buckets such as current, 30-60 days, 61-90 days etc., thereby enabling you to act immediately on overdue accounts as well as to estimate the timing of your customer receipts.

To speed up receipts, you may also consider such techniques as offering discounts for early payment; requesting customer order deposits, requiring credit checks on all new customers, invoicing promptly and following up on slow payments immediately.

  1. Manage your Payables

Take full advantage of creditor payment terms to pay your vendors.  Whether the terms are 60 or 90 days, think of it an interest-free line of credit.  It gives you sufficient time to collect receivables without incurring the cost of short term credit lines.  You may also want to consider the following:

  • Using electronic funds transfer to make payments on the day they are due to keep current while stretching out the use of your funds
  • Maintain open lines of communication with your suppliers so they are apprised of your financial situation. Should you ever need to delay a payment, you’ll have their trust and understanding
  • Consider vendor discount offers for early payments; but beware. These can amount to expensive loans to your suppliers, or they may provide you with a chance to reduce overall costs
  • The lowest price a vendor may offer may not always be the best deal. Sometimes more flexible payment terms can be more beneficial in the long run than stringent pay as you go bargain-basement prices
  1. Monitor your Pricing Model

When was the last time you raised your prices?  Are they keeping pace with rising costs? If labor is a significant component of your services or products, are annual salary increases eating into your profit margins?  Many small businesses hesitate to increase their prices for fear of losing customers or of a perceived lack of product differential in the marketplace.  In fact, customers actually expect their suppliers to introduce small, regular price hikes; your competition may already be doing so

  1. Don’t Buy From One Supplier

All of your eggs should not be on one basket – or bought from one farm.  There are often savings to enjoy by splitting your business between suppliers.  It also has the added advantage of controlling any potential future supply shortages.  You may need to purchase certain items from a renowned dealer who provides expertise, service and training (i.e. computers, trucks, accounting software) while you can compare prices to buy run of the mill items such as printer cartridges, cables and copy paper from a mail order catalog or box store merchant.  You can also renegotiate or shop your insurance policies, the cost of which tends to rise over time and should be reviewed every few years to ensure that rates remain competitive

  1. Don’t Overstock Your Inventory

Inventory requires a significant investment.  Regularly gauge your inventory turnover to ensure that it is within industry norms and avoid buying more than you need when suppliers lure you with big discounts thereby tying up cash that can be best employed elsewhere.  Periodically review your stock for old or stale inventory and consider marking it down to improve your liquidity

  1. Lease versus Buy

Although leasing generally costs more than buying, the added costs can often be justified by the cash flow benefits.  Consider leasing assets such as computer equipment, autos and truck or other large tools that may require significant upfront investment in an outright purchase to avoid using precious cash or lines of credit.  In addition, lease payments (as opposed to the principal portion of loan payments) are considered a business expense, thereby retaining the tax benefits even though the items are not purchased

  1. Surviving Lean Times

Despite your diligence, it’s bound to happen; the question isn’t “if”, it’s “when”.  The key to managing shortfalls is to identify the problem as soon as possible.  This is where your cash flow projection can prove invaluable.  Banks are wary of borrowers who have to have money today. They prefer lending before you need it and do not like businesses that do not plan.  The preferred course of action is to secure a line of credit from your bank in anticipation of a rainy day (or drought for that matter).

Nevertheless, if bankers won’t help, ask your suppliers who generally have a more vested interest in keeping you as a customer than a banker.  As a long standing good customer, you can often obtain extended terms from suppliers that effectively provide your business with a sizable, low-cost loan.

Analyze your outstanding bills and carefully choose who you pay.  Employees should be paid first, followed by crucial suppliers. Stay in contact with the other vendors to see if you can skip a payment, make a partial payment or arrange terms.

Financial service companies known as factors pay you today at a discounted rate for receivables you may not otherwise be able to collect in the very near future.  By using a factor, you will eliminate the chore of collecting your A/R and be able to weather the storm without borrowing.

Another option is to ask your best customers to accelerate payments by explaining your circumstances and possibly offering a discount as consideration for doing so.  Now is also the time to become aggressive with your slow payers – those with invoices more than 90 days past due – offering them steep discounts for payment today.

If you have questions, please contact Victor C. Belgiorno at 516-861-3704 or .

 
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