Archive for the ‘Accounts payable’ category

Taking Action on Cash-Flow

December 28th, 2015

Cash Flow womanCash flow is the lifeblood of any business, and in any business there are cash flow dangers. There is a capacity for a business to accumulate costs. They gradually grow month-by-month and your cash flow gradually diminishes to a trickle and finally dries up. Your only defense is to watch, record, compare and trend your costs.

Understanding what the numbers mean is crucial to your cash flow. Are sales trending up or down? Are expenses rising faster than sales? Is one product more profitable or better selling than another? How much do I need to sell to meet expenses each month? The answers all lie in the numbers.

The best way to measure cost trends is by analyzing the expense categories in your accounting software, and ideally graphing them to get a better visualization of their impact. If your company’s chart of accounts is properly designed, you can produce the graphs for each cost item and quickly be able to see that your power bill, for example, is gradually rising. This new perspective can now lead to an informed change in behavior that will reduce those costs or at least reduce the increase in those costs.

Once you have established your costs, you should compare them against the industry average, or at least use your own common sense and business experience. If you keep your books accurate and up to date, you will be able to calculate the relationship between your gross sales and the expenditure in any category. For example, with the help of your historical accounting data, you may decide that your postage should be 2% or 3% of gross sales. When you look over your month-end reports, you may discover that it has risen to 5%. Catching it early, you can now take corrective action.

If you are able to control your expenses, you can develop a healthy constant cash flow. When your bills are greater than your sales/receivables, your first reaction is most likely that you need to increase sales and collections. Although that is always a good idea, even when there isn’t a cash flow problem, there is still very good reason to pay particularly close attention to your expenses. If when looking at your figures you see that it takes five dollars to put one dollar on your bottom line, it then takes $5,000 of sales to yield $1,000. This means that saving $1,000 in costs is exactly the same as generating $5,000 worth of sales.

You need to look at your cash flow from an informed perspective. Here are five areas to focus on:

1. Mismanaging Credit
There are two common ways to mismanage credit in small business; granting credit without specific credit policies, and using credit with no plan for how to pay for it.

Both have a huge impact on your cash flow and are often closely related. For example, you have an opportunity to work on a big project, for which you will need to order materials. Your supplier expects payment in 30 days, but you won’t receive cash for the project for 60 days. Right away you’ve put yourself into a cash flow crunch that could take months to recover from financially. In the meantime, you’ve passed on smaller jobs that would have provided quicker cash at less cost. And, if you’re unable to pay your supplier on time, you’ve endangered that relationship as well.

2. The relationship between Receivables and Payables
In a perfect world, what customers owe you would be paid just in time for you to pay what you owe your vendors. But, as any small business owner knows “stuff happens”. The customer you thought would pay this week, doesn’t. So the bills you thought you’d pay this week, don’t get paid. Are your payables in balance with you receivables? If what you owe to others is far more than what is owed to you, then you have a cash flow problem. And if your receivables are particularly old, chances are you’ll never see that cash at all.

3. Focusing on profit instead of cash flow
Is profit the ultimate goal of every business? Did you know that many businesses that fail are operating at a profit? How can that be? For the small business, cash flow is the ultimate goal. No cash flow. No business.

The difference is mostly in the decision making process. If you take on this big job, it will earn you a huge profit, but if you take on five smaller jobs, you’ll have cash to pay your bills. Yes, you want to be profitable, but every decision has to be measured against the effect it will have on cash flow.

4. Don’t forget your debt to the Tax Man
Some bills are easy to forget. Bills like sales tax, payroll taxes, estimated taxes. They just sit out there, almost off the radar. They don’t have to be paid right away. It’s easy to forget about them. But when they’re due, they’re due right now. And you better have the money to pay them or you’re in hot water with the Tax Man. That is not a place anyone wants to be. Pay them late or not at all and you end up with penalties and interest on top of what’s already due. Using the money that needs to go toward taxes to solve cash flow problems results in even more, and probably worse, cash flow problems when those taxes come due. It can take months or even years to recover.

5. Spending your company’s future on a sailboat
Haven’t you always wanted a boat, a fancy car, or a trip to Tahiti? It might be tempting to try to pass your personal purchases off as tax-deductible business expenses. But, it’s a bad idea for two reasons.

The people at the IRS are over-worked, but they weren’t born yesterday. The last thing you need is an audit that could reveal your transgressions and result in an unexpected tax bill plus penalties and interest. No company’s cash flow should have to suffer that indignity.

The other reason it’s a bad idea is that you are spending your company’s future on unnecessary expenses. Small businesses operate close to the edge. Unless you have a reserve to see you through the tough times, you’re always in danger of being on the wrong side of that edge. You must take care of the cash flow first. Then, you can pay yourself a properly taxed bonus and buy all the toys you want.

Top 4 Cash Flow Tips

September 19th, 2013

Water tap dripping dollar bills, Water waste conceptProfit is important because without it your business will fail. But for small businesses, cash flow is king. Your company’s cash flow will determine its profitability, and scrutiny of your business’ cash flow will increase your control over this dynamic. Follow these 4 cash flow tips to establish the structure you need to succeed.

1. Know Your Balance Sheet
Many business people don’t understand how cash flow works and its significance to keeping their business operating. Focusing on the profit and loss statement is potentially a fatal mistake as healthy profits can mask an impending cash flow crisis. Profit and loss statements don’t usually contain the information required to make an adequate cash flow projection. What is need is a structured balance sheet that includes all the influencing items such as debts, interest payments, inventory and so on. You want to see the data that represents your cash flow and which can be employed to project the comings and goings of your cash over the period you have selected.

2. Set Up a Cash Flow Budget, Revise it Periodically, and Stick to It
Plan forward to generate a projection of likely future sales and expenses. You, or your accountant, can set up such a cash flow worksheet in Excel to automate this exercise.

Reviewing and updating your cash flow budget regularly is your best insurance against potential cash shortages. If your business has a predictable cash flow, then revising the cash flow budget on a quarterly basis is probably sufficient. But the greater the cash flow uncertainty a business has, the more frequently a new cash flow budget should be prepared.

If cash is tight, you may need to do to weekly projections, and decide which invoices you’ll pay and which customer payments you need to collect as soon as possible.

Rapid growth sounds good but, ironically, it can bring on a surprise cash crunch. Additionally, a sudden increase in sales often creates an inventory drop that can make the timely fulfillment of orders difficult.  The extra time you spend managing your increased sales often takes up your time and results in debtors not being tracked or followed up on when their accounts become overdue. Strong sales one month often means a cash shortage next month. By monitoring the business’ cash status you can arrange credit from suppliers, banks and other sources such as factoring, to cover the temporary shortfalls.

Just like your company budget, you need to continuously reference your cash flow budget worksheet in order to drive your cash flow situation rather than become a casualty of it. So set that budget and stick to it. As your cash flow circumstances evolve you will need to revise that budget and adjust to the new level of cash management it will then require. Stay on top of your cash flow process.

3. Set Credit, Accounts Receivable & Accounts Payable Policy & Procedure as One Strategy
What credit you allow, how you monitor its use, how you manage the bills you pay, and how you pay the bills you owe, are the components of your cash flow process. How you coordinate them is what determines your actual cash flow, and often times the survival of your company.

Set Your Credit Policy & Terms
If the nature of your business requires offering credit, then it is important to set clear limits to your terms of credit.

Manage Accounts Receivable Strictly
Get payments in quickly. Master the art of debtor management. Let debtors know how much time remains before due dates. Stay in close touch with major debtors as payment deadlines approach. Offer small discounts for early payment as an incentive.

Pay Your Creditors Strategically
Take advantage of credit terms and prioritize payments according to the consequences involved in becoming past-due. Wages, taxes and direct debits are at the top of the list for on-time payment. Key suppliers may be prepared to wait to keep your business. Don’t pay early just to get a discounted price unless getting the discount is better than being without the cash.

Plan for Lean Times
Monitor your bank balances, be aware of when lean cash flow periods are coming up, and plan accordingly. Avoid funding major purchases from your business’ working capital unless you are sure you have the cash to cover it.

4. Get financial products working to your benefit
Overdrafts, premium funding, lease facilities and cash flow funding products such as factoring can all be excellent tools to help match cash supply with outlays. These arrangements take time to set up, so you need to be prepared in advance. In a pinch, the business credit card can be a good way to ease the crunch as long as it can be paid off before interest kicks in.

Of course there are other items that impede proper cash flow, and are important to avoid, such as:

  • tax penalties
  • non-budgeted purchases
  • personal use of company monies
  • making advances and loans to employees
  • having un-deposited checks sitting on your desk
  • not investing excess cash
  • etc., etc., etc….

But the four major categories discussed above should be your first concern as they are the foundation for establishing control over your cash flow and the impact it has on your business’ profit, survival and growth.

6 Tips for Cost Improvement

June 12th, 2013

6 Tips for Cost ImprovementMost small business owners can agree that saving more money is a continually reoccurring topic. Cutting costs, boosting cash flow and paying less in taxes, will allow you to keep more of what you make, and is a good entrepreneurial frame of mind to be in.

To take this from prudent thinking to actual practice, and put more money in your own pocket, utilize these six tips to put your business on the path to fiscal improvement.

1. Talk to your employees
Employees who are on the front lines of your business, dealing with customers, processes and systems, often have ideas for ways you can cut costs. Have you listened to them? Sit down with your employees and brainstorm ways that costs could be cut without sacrificing quality. Make it more interesting for them by offering a bonus to the people who come up with ideas that have a positive impact on the bottom line.

2. Pay attention to detail
Often, substantial sums of money slip between the cracks a few dollars at a time. One good crack to seal up could be done by reevaluating your businesses recurring expenses. This could be a subscription you signed up for a year ago, insurance that you no longer really need, or a monthly membership fee to an organization you’re no longer involved with. Auto billing is a great way to reduce the cost of paying reoccurring expenses. But it is common that these fees can get rolled into your monthly credit card bill to the point that you no longer notice them. And little sums do add up. Go over all invoices and bills in detail and cut out anything you don’t really need. And don’t stop after looking at auto payments, review everything that isn’t providing a return on investment (ROI).

3. Negotiate with vendors
What you’ve been paying your vendors does not have to be the final word on what you continue paying. Ultimately, vendors want to stay in business too, and they’re dealing with a tough economy just as you are. Many are often willing to negotiate lower prices rather than lose a regular customer. The potential to save money, without even having to change vendors, can result in better prices on everything from office supplies to the phone bill. You certainly won’t lose anything by trying, and you may find yourself able to shave several hundred dollars off your monthly operating costs.

4. Stay on top of your invoices
One of the biggest cash flow problems for small businesses are the slow-paying customers. To speed up the process, make sure your invoicing system is working smoothly. Your invoices should be clear, easy to read, and simply state what is due and when. Make sure you’re meeting any special requirements of each customer, such as including purchase order numbers, and that your invoices are going to the right person at the right address. This may sound basic, but simple errors like putting the wrong suite number on an invoice can cause delays.

5. Enable customers to pay invoices faster
Once your invoicing system is cleaned up, look for other ways to encourage customers to pay you even faster. Depending on your industry and financial situation, this could mean offering a discount for cash payments or early payments. Encourage your customers to use e-payments. This will not only enable faster payment, but also saves processing time on your end.

6. Partner with your accountant
Sure, you have an accountant, but do you only get together at tax time? A good accountant can help shape up your business’s finances all year long. Enlist your accountant to give your company a checkup. What could be improved? Where could you cut costs, free up cash, or make more by putting profits back into the business? Check in with your accountant once a month to follow up on results, fine-tune systems, and make sure your company is on track. There is a wealth of information in your books for improved business decisions. Have your accountant help you access it and be rewarded with higher profits, better cash flow, lower expenses, reduced taxes, and more money going into your pocket.

5 Tips for Cash Flow Management

December 18th, 2012

Cash flow is the lifeblood of any business, and in any business there are cash flow dangers. There is a capacity for a business to accumulate costs. They gradually grow month-by-month and your cash flow gradually diminishes to a trickle and finally dries up. Your only defense is to watch, record, compare and trend your costs.

Understanding what the numbers mean is crucial to your cash flow. Are sales trending up or down? Are expenses rising faster than sales? Is one product more profitable or better selling than another? How much do I need to sell to meet expenses each month? The answers all lie in the numbers.

The best way to measure cost trends is by analyzing the expense categories in your software, and ideally graphing them to get a better visualization of their impact. If the chart of accounts in your program is properly designed, you can produce the graphs for each cost item and quickly be able to see that your power bill, for example, is gradually rising. This new perspective can now lead to an informed change in behavior that will reduce those costs or at least reduce the increase in those costs.

Once you have established your costs, you should compare them against the industry average, or at least use your own common sense and business experience. If you keep your books accurate and up to date, you will be able to calculate the relationship between your gross sales and the expenditure in any category. For example, with the help of your historical data, you may decide that your postage should be 2% or 3% of gross sales. When you look over your month-end reports, you may discover that it has risen to 5%. Catching it early, you can now take corrective action.

If you are able to control your expenses, you can develop a healthy constant cash flow. Normally, it’s the cost of your expenses that sucks up your cash and put you in an uncomfortable position.

When your bills are greater than your sales/receivables, your first reaction is most likely that you need to increase sales and collections. Although that is always a good idea, even when there isn’t a cash flow problem, there is still very good reason to pay particularly close attention to your expenses. If when looking at your figures, you see that it takes five dollars to put one dollar on your bottom line, it then takes $5,000 of sales to yield $1,000. This means that saving $1,000 in costs is exactly the same as generating $5,000 worth of sales.

You need to look at your cash flow from an informed perspective. Here are five areas to focus on:

1. Mismanaging Credit
There are two common ways to mismanage credit in small business; granting credit without specific credit policies, and using credit with no plan for how to pay for it.

Both have a huge impact on your cash flow and are often closely related. For example, you have an opportunity to work on a big project, for which you will need to order materials. Your supplier expects payment in 30 days, but you won’t receive cash for the project for 60 days. Right away you’ve put yourself into a cash flow crunch that could take months to recover from financially. In the meantime, you’ve passed on smaller jobs that would have provided quicker cash at less cost. And, if you’re unable to pay your supplier on time, you’ve endangered that relationship as well.

2. The relationship between Receivables and Payables
In a perfect world, what customers owe you would be paid just in time for you to pay what you owe your vendors. But, as any small business owner knows “stuff happens”. The customer you thought would pay this week, doesn’t. So the bills you thought you’d pay this week, don’t get paid. Are your payables in balance with you receivables? If what you owe to others is far more than what is owed to you, then you have a cash flow problem. And if your receivables are particularly old, chances are good you’ll never see that cash at all.

3. Focusing on profit instead of cash flow
Is profit the ultimate goal of every business? Did you know that many businesses that fail are operating at a profit? How can that be? For the small business, cash flow is the ultimate goal. No cash flow. No business.

The difference is mostly in the decision making process. If you take on this big job, it will earn you a huge profit, but if you take on five smaller jobs, you’ll have cash to pay your bills. Yes, you want to be profitable, but every decision has to be measured against the effect it will have on cash flow.

4. Don’t forget your debt to the Tax Man
Some bills are easy to forget. Bills like sales tax, payroll taxes, estimated taxes. They just sit out there, almost off the radar. They don’t have to be paid right away. It’s easy to forget about them. But when they’re due, they’re due right now. And you better have the money to pay them or you’re in hot water with the Tax Man. That is not a place anyone wants to be. Pay them late or not at all and you end up with penalties and interest on top of what’s already due. Using the money that needs to go toward taxes to solve cash flow problems results in even more, and probably worse, cash flow problems when those taxes come due. It can take months or even years to recover.

5. Spending your company’s future on a sailboat
Haven’t you always wanted a boat, a fancy car, or a trip to Tahiti? It might be tempting to try to pass your personal purchases off as tax-deductible business expenses. But, it’s a bad idea for two reasons.

The people at the IRS are over-worked, but they weren’t born yesterday. The last thing you need is an audit that could reveal your transgressions and result in an unexpected tax bill plus penalties and interest. No company’s cash flow should have to suffer that indignity.

The other reason it’s a bad idea is that you are spending your company’s future on unnecessary expenses. Small businesses operate close to the edge. Unless you have a reserve to see you through the tough times, you’re always in danger of being on the wrong side of that edge. You must take care of the cash flow first. Then, you can pay yourself a properly taxed bonus and buy all the toys you want.

Paying Bills in a Cash Flow System

October 27th, 2011

One of the chief determiners of cash flow is how the accounts payable process is managed. Sometimes a small business will experience reoccurring cash shortages due to ineffectively managing the payables. Once a consistent procedure is developed, the accounts payable process can go smoothly. Here are some tips for managing this process and boosting cash flow.

1. Use Accounting Software
When used correctly and consistently, software such as QuickBooks will serve several important functions. It will be a reminder as to when bills are due, an easy way to generate payments, and it will post the payments into the check register.

2. Organize Your Bills and Vendors
To properly manage accounts payable you need to organize your documents. All the invoices should be tracked along with their payment schedules so you will be aware of when the accounts become due, and if a vendor offers a discount for early payment.

Prioritizing the suppliers is also crucial in managing accounts payables. Classify the bills that you need to pay first. Items such as wages, taxes and direct debits are at the top of the list for on-time payment. Key suppliers may be prepared to wait to keep your business, but you still want to pay them on time, especially if they offer terms. See if you can identify any suppliers that you can pay late without penalty, but don’t always pay them late, only when you have no other choice.

3. Understand the Terms of Payment
One of the most effective ways to manage your company’s money is to understand the terms your vendors expect. These can include Net 15 Days, Due Upon Receipt, price reductions for early payment, and others. Start by making sure you understand the discount terminology being used. When engaging new vendors negotiate the longest payment period possible, and then pay your bills at the latest possible date to preserve your cash flow. Just don’t pay late, as you may incur an additional expense from the resulting late charge.

4. Schedule Your Payments
A foundation for a good system will have you enter the bills into your system and schedule them for payment as you receive them. Likewise, file credit card items on the same day they are expensed. Ensure employees are trained on how to file expense reports. Timely entering of the various accounts payable items into your system is the first step in avoiding late payments, finance charges, and possible damage to the business credit score and the vendor relationship.

When entering and scheduling your payables, make sure it’s done accurately. It is very important to examine the bill and enter the correct vendor name, bill due date, and invoice number. Entering an incorrect due date will result in a payment occurring sooner or later than necessary. After entering them, stamp them as “Entered” or “Posted” using a rubber stamp with red ink. Be sure to write on the bill the date they were entered.

If there is a large volume of bills, organize them in an alphabetical file to make them easy to locate. If you have a small amount of bills they could be placed in a single file without causing confusion.

5. Be a Reliable Payer
When considering how to optimize cash flow, you want to maximize the operating capital your business has at a given point in time. With this in mind, you should always consult your cash flow worksheet before paying your bills. A good cash flow report will tell you how much money you will have left to operate your company once payments are made to your vendors. This will help you set a strategic timetable for paying bills, and help make sure you have enough money to pay your bills without bouncing checks. Your cash flow worksheet can give you important insight as to when it’s best to pay.

You need to establish a consistent payment schedule, perhaps paying bills on a weekly or biweekly basis. If you use a software package, you can even set up an electronic payment schedule to automatically make the payments on the appropriate date.

6. Watch for Danger Signs
You need to watch your cash flow patterns. Analyzing them regularly will give you the opportunity to spot serious cash flow problems early enough to take effective action.

Managing your accounts payable is an integral component in the cash flow process that includes your accounts receivable and the credit terms and policies you have in place to support the process by which your company gets paid. Your goal is to make sure there is always enough cash flowing into the company to cover the cash flowing out of your company. For many small business owners, that balance is achieved through the strategic timing of bill payment.