“Check My Flow…”

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“Check My Flow…”

“Check My Flow…”

– Pink from the song, So What?

According to the urban dictionary, “check my flow” is an American slang way to say “Am I good?”  Check my flow as in “how do I look” or “how am I doing?”  Business owners should manage and analyze the cash flow of their companies to understand how they look and how the business is doing.  Proper and careful cash flow management, allows a company to project cash needs and to estimate the amount of cash that it will have or need at a given time.  Cash flow management attempts to avoid extended cash shortages caused by having a gap between cash inflows and outflows.  Many times, companies do not go out of business due to a lack of sales; they go out of business due to a lack of cash.  Many business owners view growth (more sales) as the answer to a cash crunch. However, growth puts strain on a business’s cash.  Understanding and managing cash flow will help a business owner avoid a shortfall in cash and keep a business owner from being surprised when they achieve a growth goal only to find they have created a cash-flow problem in the process.

Positive cash flow for a company does not come by accident; it takes work.  As the business owner, you need to manage the inflow and outflow of cash effectively.  Understand that profit doesn’t equal cash flow.  Knowing if you earned a profit or suffered a loss does not tell you what happened to your cash.  Other numbers factor into your cash flow, such as accounts receivables and payables, inventory, and debt payments.  How cash flows through a business can be thought of as how quickly you can turn cash on hand today back into cash later.  There are many software accounting programs that have built-in reporting features that make cash flow analysis easy. Most accounting packages geared to small businesses (like Quickbooks) will help you produce a cash flow statement.  Additionally, the Small Business Administration has a free cash flow worksheet you can use (SBA.gov).

Start by preparing cash flow projections for next week, next quarter, and next year – an accurate cash flow projection can alert you to trouble before it becomes reality.  Once you have the hang of the analysis you will now which time frame best works for you.  Cash flow plans are not glimpses into the future but rather educated guesses that balance a number of factors, including your customers’ payment histories, your own thoroughness at identifying expenditures, and your vendors’ patience.  Do not make assumptions without justification in regard to historical receivable collection and limits on payable terms.  In all cases you are trying to answer the question: How much cash (customer payments, interest earnings, service fees, partial collections of bad debts, etc.) are we going to get in, and when?

Once you have learned how to analyze the cash flow of your business, the next step of cash flow management is to strategize ways to maintain adequate cash for your business – shortening the cash flow conversion period (turning cash back into cash) so that your business can bring in money faster.  The SBA recommends a focus in the following areas:

Collecting receivables – Speed up the receipt and processing of receivables.

  • Ask customers to pay electronically – pre-authorized checks or electronic transfer.
  • Try offering discounts to customers if they pay bills quickly.
  • Check your bank for the cost of a lockbox service, boxes serviced by banks so that checks will be processed by the bank more quickly.
  • Centralize your banking at one bank.
  • If industry (and customers/environment) allows, attempt to collect progress payments. Services such as software development, home repair, or landscaping can be greatly benefited from the practice of collecting a certain percentage of the total invoice up front or during the job.
  • Tracking your past-due accounts and actively pursuing collections.
  • Institute a policy of cash on delivery as an alternative to refusing to do business with slow-paying customers.

Tighten credit requirements

  • Offer credit terms only if it is an industry standard.
  • Perform credit checks on customers you will offer terms – Dun & Bradstreet reports and detailed credit applications with credit references.
  • Monitoring your customers’ use of credit and adjusting their credit limits accordingly.

Increase sales

  • Preparing customer invoices immediately upon delivery of your goods or services to the customer – if you wait to prepare your invoices at the end of the month, for example, you may be adding as many as 30 extra days to your cash flow conversion period.
  • New customer acquisition is also essential to growing a business, but remember, it can take time and money to convert prospects into sales and do the new sales result in cash or A/R (if you give terms).
  • Analyzing why, what, and when your existing customers are buying – new sales to existing customers may be easier to gain than sales to a totally new customer.

 

Manage Payables

  • Take advantage of creditor payment terms – if a payment is due in 30 days, don’t pay it in 15 days.
  • Use electronic funds transfer to make payments; remain current while retaining use of your funds as long as possible.
  • Communicate with your suppliers often rather than only when you need to delay a payment. Build a relationship so you have their trust and understanding.
  • Choose the bills you’ll pay carefully – don’t just pay the smallest ones and let the rest slide. Make payroll first as unpaid employees will soon be ex-employees; pay crucial suppliers next and ask the rest if you can skip a payment or make a partial payment.
  • Don’t always focus on the lowest price when choosing suppliers. Sometimes flexible payment terms can improve your cash flow more than a bargain-basement price.

 

Securing Loans

  • Securing a bank loan before a cash flow shortfall occurs will help you cover the shortfall.
  • Be sure to match the use of revolving lines of credit and/or equity loans for the intended life of the asset being covered and be sure to factor repayment into your cash flow calculations so that your line of credit, for example, doesn’t become fully drawn with no ability to pay down.

Even with careful cash flow analysis you may still find yourself in a cash shortfall.  This does not automatically point to a planning failure; this simply means that you are a normal entrepreneur who isn’t able to always predict the future.  When this situation occurs, hopefully, you are aware of the problem early and are aware of how much you need ad for how long to make it through the shortfall.  Customers, suppliers, and banks are potential sources that allow you to weather the storm; however, these sources are often wary of businesses that have to have money right away.  When you go to these sources for cash, your failure to plan is making your problem their problem and they are probably not going to be very interested in helping you out.  It is far easier to gain support, or a loan, before you need it; preferably months before, in the case of a line of credit.  Assuming that you will someday be short on cash, you can arrange for a line of credit at your bank in advance of the cash shortfall.  If bankers won’t help, turn next to your suppliers. These people are more interested in keeping you going than a banker, and they probably know more about your business. You can often get extended terms from suppliers that amount to a hefty, low-cost loan just by asking. That’s especially true if you’ve been a good customer in the past and kept them informed about your financial situation.  Next, if a bank line or suppliers are not an option, you can ask your best customers to accelerate payments.  Explain the situation and, if necessary, offer a discount of a percentage point or two off the bill.  You can also go after your worst customers by offering them a steep discount if they pay today if their bill is over 90 days old, for example.  In a really desperate situation, take a look around your business for assets that you are no longer utilizing – you may be able to sell or lease back equipment, computers, phone systems, etc.; or you may be able to sell off un-needed or outdated inventory for fast cash.

Cash is king as the saying goes and this is especially true when it comes to the financial management of a growing company.  The time in between when you have to pay your suppliers and employees and the time you collect from your customers can certainly be a problem; the solution is sound cash flow management and proper planning for eventual shortfalls.

Wesley Shie

Wes Shie joined the staff of the Northeast ISBDC as a business advisor in November of 2010 and has served as the Regional Director since October 2014. He came to the center with years of experience in banking and financial services, having worked as a relationship manager for Wells Fargo and Chase Bank in the past. Shie also served as a finance specialist for the Community Development Corporation (CDC) of Fort Wayne prior to working in commercial banking. The Fort Wayne native is a graduate of Northrop High School and Indiana University-Purdue University Fort Wayne (IPFW), where he received a Bachelor of Science degree in Organizational Leadership and Supervision with a minor in General Business in 1995.
Wesley Shie can be reached at wshie@isbdc.org.
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