10 tricks to keeping your cash
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
"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.
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.
steps to fiscal health
Here are 10 ways to keep your cash flow healthy and your company
- 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.
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
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
- 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).
"That way, if you have a cash shortfall, you'll
have some place to go," Williams advises.
- Organize backup
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
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
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.
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.
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
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-- Posted: March 10, 2000