Published on 10/26/2015
Writtin by: Paul Bogdanoff, CPA and Tim Dages, CPA
Most small business owners believe the success and survival of their business hinges on sales, the more sales they have the better the chances of long term survival. In reality a business can have all the sales they want but if they cannot get paid for and collect the money that is due to them from those sales along with managing the cash going out the door their chances of having a viable entity for an extended period of time is not very good, thus the old adage “Cash is King”. Any business’s survival stems directly from its ability to control the lifeblood of the business, that is the cash coming in and the cash going out.
Bogdanoff Dages and Co. would like to offer some tips and strategies to help manage the most important aspect of any business – cash flow. First a few questions, do you keep a close eye on your weekly, monthly and yearly income and expenses? Do you understand the difference between your profit and your bank balance? Do you know whether you will be able to pay your employees, suppliers and creditors on time – this month and in future months? If you do you are ahead of most small businesses but even if you have a handle on these items do you have an understanding of your cash flow and how to manage it?
Business’s that struggle with cash flow may think if they can increase sales and that will solve the cash flow problem. Truth be told, if you are having trouble getting the cash from prior sales in the door more sales is most likely not the answer and may cause a bigger issue. Normally with increased sales comes increased costs and thus a bigger cash flow issue. The real answer is to get the cash you are due to come in faster and control the cash you need to pay out. So how is this done?
Start with cash flow projections. Take the profit and loss projections and expand them to take into account the cash that will be coming in from the sales and the cash that will be needed to pay the bills. When performing this exercise be honest, it won’t do any good to fudge the numbers. If the time is taken to do the projections appropriately and honestly you will see in advance when you will potentially have cash flow issues from issues such as slowing sales, slow paying customers and additional cash outlays for those items that do not occur on a regular cycle.
Get your invoices out to your customers ASAP! One thing is for certain your customer will not pay you for your goods or services until you ask them for it via an invoice.
Review your customers payment terms and adjust them accordingly. You will need to go through customers payment histories to make sure that the current terms are still viable. If there are continual late payers adjust the interest or penalties charged on late payments to encourage more timely payments. Look at possibly requiring down payments and deposits for large orders or retainers for service agreements.
Offer incentives for early payments. It is much better to give up a little today to get the cash in the door quicker. Another incentive would be to discuss lowering the total amount due for the larger outstanding balances if they will bring their account current. Again it is much better to have a lesser amount today than no payment at all. The longer an account remains outstanding the more difficult it is to collect.
The controlling of the cash disbursements for your business goes hand and hand with working to get your customers payments in the door quicker. Use your vendor’s terms to your advantage. If there is not a discount given for early pay then make sure to use all of the payment period allowed to keep your cash in your hands for as long as possible. Make sure to adhere to the vendor’s terms though as you never know when you may need to go to them for a some extra time to pay in those lean cash flow periods. They will be more likely to work with you if you have a good payment history.
If you have employees switch to bimonthly payroll. The actual cash outlay will be the same but the number of payrolls will decrease from 26 to 24.
Take the time to work with your bank and set up a line of credit. The time to set it up is when you don’t need it, not when you are in a cash crunch. By going to the bank when you are in need of the loan shows a lack of planning on your part and banks do not look favorably upon that. Also, make sure the financial reports show sufficient cash flow to support the repayment of any borrowings you may take in the future.
If it makes sense there are companies that will buy your receivables form you at a discount and give you the cash now as opposed to waiting for future payments. Although this is an expensive way to get what is due you, sometimes it makes sense.
To summarize, control of your cash and successful cash flow management comes down to four steps:
While these steps and processes are simple to understand, they can become complex when trying to put them into practice. Bogdanoff Dages and Co. is here to discuss and help you implement the strategies needed to create consistent and reliable cash flow in your business.