Tag Archive: accounts_receivable

Cash Flow Best Practices: Four Ways to Improve Day-to-Day Money Management

Cash Flow Best Practices: Four Ways to Improve Day-to-Day Money Management
by Sherron Lumley.

When a business has more money coming in than going out, that’s positive cash flow. Ideally, this is the zone in which a small business could operate forever, like a perpetual motion machine. Even though understanding cash flow seems simple, the day-to-day reality of it can cause mayhem. What to do when a customer payment is in the pipeline for next month, but employees must be paid on Friday, raw materials purchased next week, and the electricity bill taken care of by 5:00 p.m. today? These are the do-or-die questions of cash flow.

According to business information giant Dun and Bradstreet, 90 percent of small business failures are caused by poor cash flow. That’s why creating a cash flow budget, maintaining a cash reserve, getting paid on time, and managing expenses are critical policies to keep your small business successful.

Cash flow management would appear simple except for one major complication, and that’s credit. Accounts receivable and accounts payable are by-products of credit arrangements and the length of time between money paid and money received is called the cash conversion cycle. In a nutshell, cash flow management is about minimizing this cash conversion cycle. The ins and outs of cash flow fill some hefty tomes of financial literature, but here are four simple best practices to improve day-to-day money management for small businesses.

PQ_CashFlow.jpgFirst, make a plan

“The first requirement is an effective budget. If you don’t know what your cash flow is, it will be difficult to manage. Both your budget and your projections should be reviewed and adjusted on a timely basis,” says Andrew Schrage, former hedge fund analyst and founder of Money Crashers, a financial advice website.

The plan, otherwise known as a cash flow budget, is a way to project your business’s cash inflows and outflows over a defined period of time, say six months. The U.S. Chamber of Commerce provides a free download of a cash flow budget worksheet with relevant categories and explanations of what you need to do to prepare a cash flow budget. You start with the current cash, add the projected cash inflows, and then subtract the cash outflows to get your cash flow bottom line.

Have a contingency plan (or two)

In order to anticipate cash inflow, a sales forecast is needed, which can be based on recent revenues, seasonal sales, or market research. It’s important to have several projections, including best-case and worst-case sales scenarios, with a contingency plan of how to respond to these different situations. In the event sales are lower than expected or an unforeseen crisis happens, be prepared by maintaining a cash reserve, advises Dun and Bradstreet. Have alternate sources of cash for when unexpected needs arise, and get to know your bankers before you need a loan from them.

“If you’re in a business with inventory, or if you have employees, you should have a six-month cash reserve,” advises SCORE.org, a non-profit entrepreneurial mentor organization that works in conjunction with the U.S. Small Business Administration.

Managing inventory—mind the gap

The cash conversion cycle breaks down into three categories: accounts payable, accounts receivable, and inventory. Too much or obsolete inventory leads to negative cash flow. Although some cash is going to have to be spent to have inventory on hand, clearly, the less inventory sitting around and becoming obsolete, the better. A closer look: The Inventory Conversion Period (ICP) refers to the length of time between the purchase of raw material and the sale of the finished product. Since the business must wait for the sale, then wait some more for the accounts receivable to be converted to cash; any money tied up in maintaining inventory becomes a drag on cash flow. Conversely, a business can temporarily boost its coffers by waiting until the end of the reporting period to pay its own bills.

If possible, wait 30 or 60 days to pay suppliers and ask for a discount for early payment. “1

You know that you can improve cash flow by slowing down your payment of accounts payable,” says Sam Thacker, writing for Dun & Bradstreet. Thacker is a partner in the Austin, Texas based financial consulting firm, Business Finance Solutions, which assists small businesses with financing challenges.

The flip side of the ICP is the Receivable Conversion Period (RCP), which is the time lag between selling on credit and receipt of cash for the accounts receivable. When customers or business partners show stable or positive trends in payment and avoid delinquency, expand their credit line to encourage revenue growth.

“Having a good handle on your accounts receivable is very critical to improving your cash flow, especially during tough economic times when everyone else is slowing down their payables,” Thacker points out.

Cut costs and expand with caution

“The more money you can save, the less you will need to rely on outside investors,” advises Schrage at Money Crashers. For example, “Start by saving money on start-up costs. Investigate your options to acquire used computer equipment, office furniture, and other supplies,” he says.

“You can also consider delaying hiring as one of a number of strategies to trim expenses,” adds Schrage. Running a business solo can save you a great deal of money, as long as you’re willing to put in the work.”

Cutting costs can significantly free up your small business’s cash flow. Simple initiatives such as keeping an eye on overhead expenses such as rent and travel, and shopping for competitive prices among suppliers can make a big difference.

Lastly, expand with caution. “In addition to your budget and income and expense projections, you should have a plan in place as to how and when you plan to expand,” explains Schrage. “The expand-at-all-costs business model is not very effective. Once you’ve got larger cash reserves and more experience in your industry, then you can be a little more aggressive in terms of growth.” Expanding through your business’s own cash flow is often an attractive alternative to outside debt or equity financing.

Cash flow resources available online:

The U.S. Chamber of Commerce has information on preparing a sales forecast and an online cash flow budget worksheet.
Microsoft Office has a free template online for creating a cash flow statement.
Score.org provides a free template for a 12-month cash flow projection.
The U.S. Small Business Administration provides guidelines for 7(a) loans (the most basic and most used within the SBA program), for starting, acquiring and expanding a small business.
Dun & Bradstreet provides information on establishing, building and monitoring business credit.

Cash Flow Best Practices: Four Ways to Improve Day-to-Day Money Management

Cash Flow Best Practices: Four Ways to Improve Day-to-Day Money Management
By Sherron Lumley.

When a business has more money coming in than going out, that’s positive cash flow. Ideally, this is the zone in which a small business could operate forever, like a perpetual motion machine. Even though understanding cash flow seems simple, the day-to-day reality of it can cause mayhem. What to do when a customer payment is in the pipeline for next month, but employees must be paid on Friday, raw materials purchased next week, and the electricity bill taken care of by 5:00 p.m. today? These are the do-or-die questions of cash flow.

According to business information giant Dun and Bradstreet, 90 percent of small business failures are caused by poor cash flow. That’s why creating a cash flow budget, maintaining a cash reserve, getting paid on time, and managing expenses are critical policies to keep your small business successful.

Cash flow management would appear simple except for one major complication, and that’s credit. Accounts receivable and accounts payable are by-products of credit arrangements and the length of time between money paid and money received is called the cash conversion cycle. In a nutshell, cash flow management is about minimizing this cash conversion cycle. The ins and outs of cash flow fill some hefty tomes of financial literature, but here are four simple best practices to improve day-to-day money management for small businesses.

PQ_CashFlow.jpgFirst, make a plan

“The first requirement is an effective budget. If you don’t know what your cash flow is, it will be difficult to manage. Both your budget and your projections should be reviewed and adjusted on a timely basis,” says Andrew Schrage, former hedge fund analyst and founder of Money Crashers, a financial advice website.

The plan, otherwise known as a cash flow budget, is a way to project your business’s cash inflows and outflows over a defined period of time, say six months. The U.S. Chamber of Commerce provides a free download of a cash flow budget worksheet with relevant categories and explanations of what you need to do to prepare a cash flow budget. You start with the current cash, add the projected cash inflows, and then subtract the cash outflows to get your cash flow bottom line.

Have a contingency plan (or two)

In order to anticipate cash inflow, a sales forecast is needed, which can be based on recent revenues, seasonal sales, or market research. It’s important to have several projections, including best-case and worst-case sales scenarios, with a contingency plan of how to respond to these different situations. In the event sales are lower than expected or an unforeseen crisis happens, be prepared by maintaining a cash reserve, advises Dun and Bradstreet. Have alternate sources of cash for when unexpected needs arise, and get to know your bankers before you need a loan from them.

“If you’re in a business with inventory, or if you have employees, you should have a six-month cash reserve,” advises SCORE.org, a non-profit entrepreneurial mentor organization that works in conjunction with the U.S. Small Business Administration.

Managing inventory—mind the gap

The cash conversion cycle breaks down into three categories: accounts payable, accounts receivable, and inventory. Too much or obsolete inventory leads to negative cash flow. Although some cash is going to have to be spent to have inventory on hand, clearly, the less inventory sitting around and becoming obsolete, the better. A closer look: The Inventory Conversion Period (ICP) refers to the length of time between the purchase of raw material and the sale of the finished product. Since the business must wait for the sale, then wait some more for the accounts receivable to be converted to cash; any money tied up in maintaining inventory becomes a drag on cash flow. Conversely, a business can temporarily boost its coffers by waiting until the end of the reporting period to pay its own bills.

If possible, wait 30 or 60 days to pay suppliers and ask for a discount for early payment. “1

You know that you can improve cash flow by slowing down your payment of accounts payable,” says Sam Thacker, writing for Dun & Bradstreet. Thacker is a partner in the Austin, Texas based financial consulting firm, Business Finance Solutions, which assists small businesses with financing challenges.

The flip side of the ICP is the Receivable Conversion Period (RCP), which is the time lag between selling on credit and receipt of cash for the accounts receivable. When customers or business partners show stable or positive trends in payment and avoid delinquency, expand their credit line to encourage revenue growth.

“Having a good handle on your accounts receivable is very critical to improving your cash flow, especially during tough economic times when everyone else is slowing down their payables,” Thacker points out.

Cut costs and expand with caution

“The more money you can save, the less you will need to rely on outside investors,” advises Schrage at Money Crashers. For example, “Start by saving money on start-up costs. Investigate your options to acquire used computer equipment, office furniture, and other supplies,” he says.

“You can also consider delaying hiring as one of a number of strategies to trim expenses,” adds Schrage. Running a business solo can save you a great deal of money, as long as you’re willing to put in the work.”

Cutting costs can significantly free up your small business’s cash flow. Simple initiatives such as keeping an eye on overhead expenses such as rent and travel, and shopping for competitive prices among suppliers can make a big difference.

Lastly, expand with caution. “In addition to your budget and income and expense projections, you should have a plan in place as to how and when you plan to expand,” explains Schrage. “The expand-at-all-costs business model is not very effective. Once you’ve got larger cash reserves and more experience in your industry, then you can be a little more aggressive in terms of growth.” Expanding through your business’s own cash flow is often an attractive alternative to outside debt or equity financing.

Cash flow resources available online:

The U.S. Chamber of Commerce has information on preparing a sales forecast and an online cash flow budget worksheet.
Microsoft Office has a free template online for creating a cash flow statement.
Score.org provides a free template for a 12-month cash flow projection.
The U.S. Small Business Administration provides guidelines for 7(a) loans (the most basic and most used within the SBA program), for starting, acquiring and expanding a small business.
Dun & Bradstreet provides information on establishing, building and monitoring business credit.

When is the Right Time to Bring Small Business Financial Experts on Staff?

When is the Right Time to Bring Small Business Financial Experts on Staff?Small Business – When is the Right Time to Bring Small Business Financial Experts on Staff? by Susan Caminiti.

One of the distinguishing characteristics of nearly all entrepreneurs is the passion they bring to their businesses. But whether you’re a skilled butcher, a terrific baker, or the best candlestick maker in town, there are functions of your company that you’ll need help with. And there’s no aspect of running a small business where this is more apparent than your finances for your small business.

“Money is so personal and that makes many entrepreneurs more skittish about handing over control,” observes Mark Koziel, CPA and vice president of the American Institute for Certified Public Accountants (AICPA), the world’s largest association representing the accounting profession. “A small business owner who wouldn’t think twice about reaching out for IT help is often the one who thinks that they, or maybe a bookkeeper, can handle all their finances.”

To figure out the kind of financial expertise your business needs—and when it’s time to hire a controller or even a chief financial officer—experts say it’s essential to answer a few basic questions:

What kind of growth do you envision for your small business? Will it remain a fairly small venture or will the business eventually expand to the point where it requires hiring dozens of employees?
Does the business finance receivables and inventory? Will it need funding for additional locations, offices, and equipment?

Are you looking to attract venture capital or any other type of private equity?

“When I work with small business owners I ask them to honest with me about how big they really want their companies to be,” says Barbara Steinmetz, president of Steinmetz Financial Planning in San Mateo, California. “Not every business owner wants to run a huge company with hundreds of employees.”

In that case, she says, a good bookkeeper is often enough. This person, says Steinmetz, can be full-time or part-time and should be able to keep accurate financial records that are detailed enough to enable an outside accounting firm to prepare your company’s taxes. Don’t wait until tax season, however, to discover that certain information might be lacking. Advises Steinmetz: “Keep in touch with your tax professional throughout the year. Ask if they have the documents they need and if they truly have your company’s complete financial picture.”

Despite what many small business owners may believe, there’s not one milestone revenue figure that signifies it’s time to move beyond a bookkeeper and hire a controller. Even if your business is small sales-wise, if it’s growing quickly and adding customers at a rapid clip, you should hire a controller, says Koziel of the AICPA.

Peter Fazio, executive vice president of Sterling Affair Caterers in New York City, first hired a controller two years ago when he was “done making so many mistakes.” In the early days of his company, he says, having a bookkeeper on staff was enough to handle Sterling’s bills and its receivables. But as his company grew—it now caters nearly 500 events annually—and Sterling began working with more and more vendors, Fazio says he knew it was time to bring in someone who could take a more holistic approach to Sterling’s finances.

For instance, when he was interested in looking for alternatives to the company’s outside payroll vendor, his controller was able to investigate different options and negotiate a better price, saving the company about $15,000 this year. Sterling’s controller was also the person who initiated conversations with different banks to get a better rate on the company’s line of credit. “I may have the idea of different things to look into, but I don’t have the time to follow through,” Fazio explains. “[The controller] has enabled me to take this company to the next level because I have her to focus on all the financial issues while I run the company and plan our events.”

One of the biggest obstacles in hiring any financial expert on staff is the trust factor. Fazio admits it was tough at first. “This employee knows every single thing about your business, including what you pay each employee and how much money you make,” he says. However, he is adamant about one thing: “If you try to segregate out information or just give a controller some information and not all of it, the relationship will fail,” Fazio warns. “Sign whatever confidentiality agreement you have to, but make sure your controller has all the facts.”

In addition, if a company is looking to attract venture capital or any other type of private equity, then it’s likely to need a chief financial officer. Ron Johnson, president of WAGIC, a product design, engineering, and manufacturing company based in Los Gatos, California, has had a CFO on board since his firm’s earliest days in the mid-1980s. “We raised outside capital when we were first starting out and those investors wanted to know we had someone who had plenty of experience managing the finance side of the business,” he says.

Johnson does acknowledge that for many small, early-stage businesses, cost is a factor. “At the end of the day, it does come down to what you can afford,” he explains. “However, spending $3,000 or $4,000 a month to have the services of a part-time CFO may be the best money you’ll ever spend because of the level of financial expertise they bring.”