Archive for the ‘cash flow’ 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.

10 Accounts Receivable Best Practices

April 22nd, 2014

accounts receivable cartoonProper cash flow management is always important for any organization. One of the most common causes of cash flow problems is poorly managed accounts receivable. Don’t assume that just because a customer purchased your product or services that they will pay you in a timely manner, or at all.

Slow paying customers may require you to draw down your cash reserves, or increase the amount of financing you need to cover your operations. As delinquent accounts get older, the probability of collecting those accounts diminishes. And of course, the more cash you have tied up in receivables, the less cash is available for running your business.

For charities and not-for-profits, slow collection of donation pledges and annual membership dues can put a strain on cash flow. While donations and membership dues are not technically accounts receivable, many of the same best practices can be applied to accelerate collections from your funding sources. Awareness of accounts receivable best practices becomes even more imperative not-for-profit organizations engaging in the sale of products and services to increase funding.

Follow these 10 best practices to improve the receivables process, which should improve cash flow and strengthen the bottom line:

1. Email Invoices
This will ensure your customers receive your invoices immediately, avoiding mail delays. Confirm with your customers which email address they wish you to send invoices to.

2. Shorten Payment Terms
In the days of paper invoices and checks, it was fairly common for businesses to extend credit to customers to allow for mail and payment delays, by granting credit terms, for example “Net 30”. However with the widespread adoption of email communication and electronic payment methods, businesses are now more commonly specifying “Payment due upon receipt”.

3. Have EFT and Other Payment Options
An increasing number of businesses are now paying their suppliers using Electronic Funds Transfer. By specifying on your invoice that payment may be made by EFT, you will enable your customer to deposit payment directly to your bank account. Simply include on your invoice your EFT banking information; bank, branch and account number. Also consider using PayPal and/or credit cards.

4. Establish Credit Policies
If you were going to extend a customer credit, it would be a good idea to assess their ability to pay. The expense of performing credit checks may be more than worthwhile for many businesses.

5. Review Accounts Receivables Regularly
Track the aging of your receivables, and systematically follow-up on any accounts that are past due more than a predetermined number of days. A good practice is to run an aged receivables report from your accounting system on a weekly basis, paying special attention to any receivables that are over, for example, 20 or 30 days old.

6. Use the Telephone
Follow-up unpaid invoices with a phone call if payment has not been received within a reasonable period. Written collection letters and even emails are usually less effective as they do not engage the customer in conversation. The fastest way to find out if there is a problem with a payment is to speak with your customer. Solving the problem in a manner that maintains a good customer relationship is also more likely if there is such a conversation.

7. Maintain a Collections Record
For each over-due account, keep a log of when follow-up calls or emails were sent, along with a record of customer’s responses to follow-up calls. Knowing that, for example, your customer promised to make a payment by a certain date will be invaluable if additional follow-up calls are required.

8. Offer Discounts for Early Payment
Payments are often made first to companies that offer discounts. The popular 2%/10, net 30 Days Terms means that if a customers pays within 10 days they receive a 2% discount, with the total due in 30 days. Try 2%/10, Net 20 Days. A customer may be less inclined to forgo a discount when the payment is due in only 10 more days anyway.

9. Use a Factoring Service
Using a factor is like selling your receivables to a third party at a discount. The costs involved with this method may be justified by greatly improving your cash flow, especially if you have a long collection cycle.

10. Use a Collection Agency
If you are unable to collect, you should submit the account to a collection agency. No one can guarantee to collect your outstanding receivables, but these companies tend to be very aggressive, and since they tend to charge based on the amounts they collect, this is a viable final option. Don’t expect to see any new business from these customers, but then they aren’t the kind of customers you want anyway.

Managing your accounts receivable is normally pretty straight forward as most customers pay on time. However, collection problems can be avoided, or at least minimized, with a strategy that considers the above best practices.

8 Reasons Small Businesses Can’t Make a Profit

November 11th, 2013

8 Reasons Small Businesses Can’t Make a ProfitI know from running an accounting and bookkeeping practice that many small business owners are making the same mistakes, and those mistakes prevent them from accomplishing the goal of being profitable. After all, a business isn’t there just to make money, it should be profitable.

This list of eight common mistakes that reduce or eliminate profitability is one all small business owners should check themselves against:

1.  Underestimating all the costs involved in producing, packaging and shipping a product
2.  Overestimating the size of the market for a product or service
3.  Undercharging for their services
4.  Not classifying expenses properly to take advantage of tax codes
5.  Purchasing too much, not enough or the wrong kind of insurance
6.  Overpaying on bank fees and credit card fees
7.  No collection process in place for customers that have not paid
8.  Not having accurate, up-to-date reports to provide the above information so corrections can be made

Many business owners try to keep their own records, (or have a spouse or friend help) and because they lack the knowledge and/or time to do it properly, they don’t have the information needed to evaluate and correct potential problems.

Sometimes there is enough money coming into the business to continue despite making many of these errors but correcting them could mean a much better payback for the owner. More often what happens is that the owner gets frustrated and overwhelmed. In such an environment of confusion time is not leveraged properly, decisions can be made in desperation, and more and greater mistakes are made, further distancing the company from its profit objective.

Once a proper bookkeeping system is set up and brought current, the owner can see the whole picture and assess where changes need to be made. Sometimes minor changes like switching to a different bank or credit card company, increasing prices, or outsourcing a specific task can have a big impact on profitability. Other times something more involved is necessary such as implementing a system of pricing levels, changing advertising tactics, or even changing the direction of the company to be able to offer a more competitive and profitable product line.

Having accurate bookkeeping, and its associated reports, provides the business owner with the necessary information to get a clear picture of the economics of the company. Evaluating business operations and making the day-to-day decisions becomes a process based on the facts of the business not the “feel”. Even if your company makes pants, you shouldn’t be running it by the “seat of your pants”.

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.