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10 tricks to keeping your cash flow healthy

The importance of good cash flowPoor cash flow can be the death of an otherwise healthy business. If a small business has more obligations than it has cash, it's in trouble.

"Not managing cash flow is the No. 1 reason that small businesses fail," says Gene Fairbrother, president of MBA Consulting Inc. in Coppell, Texas.

Simply put, cash flow is the money flowing in and out of your business. If, for any length of time, your business takes in less money than it spends to produce and sell goods, it suffers from poor cash flow.

Having receivables and payables out of synch is often a silent killer of small firms. Their owners are too busy selling their wares and managing other parts of the business to devote any time to financial analysis.

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It can happen to anyone
When most people think of poor cash flow, they think of a company with declining sales. But poor cash flow can happen to a business with sales bursting through the roof. In fact, fast-growth companies are especially vulnerable. They have to stock up on inventory and pay for employees while they await customer payments.

"For example, say it costs you $100,000 to produce something and a customer is willing to pay you $1 million," says Mark Deion, president of Deion Associates & Strategies Inc. His Warwick, R.I.-based firm consults on domestic and international business development issues. "Now, $900,000 is a great profit margin. But what if you have to pay the $100,000 in December and your customer's not going to pay you until April?

"You could go out of business while waiting to get paid."

Companies big and small have to watch their cash flow and keep it healthy, but "small companies have less to spare and need to be extra vigilant," says Edward E. Williams, a professor of management at Rice University's Jesse H. Jones Graduate School of Management in Houston.

10 steps to fiscal health
Here are 10 ways to keep your cash flow healthy and your company wealthy:

  • Accept responsibility for minding your company's cash flow.

Many small-business owners hire an accountant to keep the books, but that's not enough.

"Don't expect your accountant to tell you everything that you need to know," Deion says. He urges business owners to take basic accounting courses so that they can read and interpret their financial statements.

If your company has the budget to hire someone full- or part-time to oversee finances, do it.

  • Monitor your finances.

A small-business owner should always have an idea of what monthly sales are, what the expenses have been for the month, how quickly clients are paying, etc. Programs such as Intuit's QuickBooks, M.Y.O.B. Accounting and Peachtree First Accounting make it easy to track cash flow, but a business owner has to commit the time to enter the information and analyze it.

  • Forecast sales and expenses.

Estimate sales and expenses for the quarter and then modify your projections as the quarter proceeds. Don't forget ongoing expenses such as insurance, telephone, utilities and lease payments, says MBA Consulting's Fairbrother.

Some companies put together three budgets: a best-case budget, a most-realistic projection and a worst-case scenario. They use whichever budget turns out closest to the real numbers.

  • Adjust your strategy based on your financial analysis.

The whole point of monitoring cash flow is to catch small problems before they turn into migraines. "Start looking for answers," Deion says. "If sales are off, why? Are you selling to the wrong market? Has something happened to a major client?"

It's much easier to tackle issues in their formative stages (when sales are off 2 percent, not 50 percent).

  • Set up a cash reserve.

"That way, if you have a cash shortfall, you'll have some place to go," Williams advises.

  • Organize backup finances.

Factoring, credit lines or even equity financing can get you through a cash crunch, says Mike Bernstein, a partner with Grant Thornton LLP in New York City.

The trick is to have them in place before you need them.

Cash flow warning signs

The point of monitoring cash flow is to look for warning signs so you can spot problems and do something about them. Mark S. Deion, president of Deion Associates & Strategies Inc. in Warwick, R.I., gives clients the following "hot buttons" to watch:

  • Sales. What are your company's sales today, for the week and for the month? Are they up or down compared to the prior month and to the same period last year?
  • Bank balance. How much money does your company have in the bank?
  • Receivables. What's the amount due to your company by its clients? How old are your invoices?
  • Payables. How much does your company owe and when is it due? How do your payables mesh with your receivables?

"These hot buttons tell my clients whether they're on target or off target," Deion says.

  • Lease instead of purchase.

While leasing costs more in the long run, buying on the installment plan means less cash upfront, which can be a boon to a company with faltering cash flow.

  • Control spending to conserve cash.

Keeping tabs on your cash flow is much like a family setting up a budget. Look over your expenses and see what fat you can trim without the business suffering. Add employees slowly and cautiously. Don't overstock inventory, which can bleed your company of cash.

  • Accelerate receivables.

Small-business owners often become passive when it comes to bill collecting. Try to speed up payments, which will maximize your cash flow. Consider asking customers for advance payments and reward early payers with a discount. Just putting out reminder calls -- "Did you get my bill, when can I expect payment?" -- can speed money to your company's coffers.

  • Slow down payments.

Small companies shouldn't fall into arrears with their vendors, but they should stretch out payments for as long as is legally possible.

The best advice overall regarding cash flow is to "be disciplined," says Bernstein of Grant Thornton. "Discipline is half the battle: to set up plans and stick to it."

Follow Bernstein's advice and the tips offered by our other experts and your company will be in fine fettle.

Jenny C. McCune is a contributing editor based in Montana
To comment on this story, please e-mail the
Bankrate.com editors


-- Posted: March 10, 2000

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