cash flow management

Cash flow management is one of the most important and most ignored financial tools available to business owners and managers. Cash flow management is not accounting! Many business owners fail to recognize that the rules of accounting define when and how transactions are recorded in their financial statements, which is no help when they need to manage their cash for next week and next month.

True cash flow management must be based on a cash flow projection, a tool which forecasts the actual date that deposits (revenue) will be made and when, in the future, expenses will be paid. How important is cash flow? Keep in mind that businesses fail every day because they run out of cash, even though their income statement showed the business to be operating profitably.

What to do when you find yourself in a cash crunch? First, understand the factors that drive cash flow and how you can take control. The following factors have the greatest impact on cash flow:

• Accounts Receivable (time between generating the invoice and depositing the cash)
• Accounts Payable (time between receiving the invoice for purchases made and your payment of that invoice clearing the bank)
• Inventory (time between paying for the materials and depositing the income from the sale of the finished product)
• Capital expenditures (cash out to make the purchase vs. recording depreciation expense over the useful life)

Later in this report, we'll focus on cash flow projection tools and techniques. Let's start with some quick fixes that can get you some relief from a cash crunch.

1. Get the Money!

a. Issue invoices quickly - Don't wait until the end of the week or month to generate and mail invoicesb. Ask your best customers to accelerate their paymentsc. Offer rewards to customers for quick paymentd. Offer electronic fund transfers as a method of payment to eliminate "it's in the mail" timee. Include promotional flyers with invoices - Offer perks for quick payments or to promote the launch of your new product or servicef. Require COD on future sales for slow pay customersg. Aggressively pursue unpaid invoices, i.e. one day past the due date
• Call the customer weekly - Take detailed notes of each call and conversation
• Involve the owner of the company - Don't stop at the AP clerk, call the owner directly
• Create a written collections policy and follow it, don't be a "softy" - Define hard timeframes for action. For instance, an invoice that is due in 30 days; at 31 days, call the customer: at 45 days, offer a payment plan: at 75 days, turn over to a collections agency: etc...
• Take legal action sooner rather than later - The longer you wait, the further down the list of creditors you may be
b. Restructure your invoices to define a specific date the payment is due. Your invoice should encourage action, not inaction, i.e. "Payment due June 2" is better than "Payment Due in 30 days".

a. Prioritize the payment of invoices - All invoices are NOT created equal!
• Pay the most important invoices first
• Minimize late fees, finance charges and penalties - Pay invoices with the highest penalties first
b. Communicate with your lenders sooner rather than later - Your cash issues will get worse before they get better!
• Negotiate interest-only payments on loans for the next 6 months, without penalties
• Never promise anything you cannot deliver, especially with your banker - if you can only pay $300 per month, do NOT agree to pay $500 per month
c. Contact suppliers and negotiate extended payment terms, without penaltiesd. Search for new suppliers that offer longer payment terms
• Longer payment terms can be much more valuable than a lower price
e. Consolidate loans, where possible

a. Sell off out-of-date inventory, unused equipment; anything else you have around that's not making money
• Pawn shops, Craig's List, EBay, and inventory liquidation firms are just a few of the options available
b. Consider selling your accounts receivables to a Factoring company
• Factoring companies will buy your accounts receivables, at a discount - You get the cash quickly, they assume the hassle of collecting from the customers
c. Consider using leasing companies to sell and then lease back your current assets, such as machinery, equipment, computers, software, phone systems and even office furnitured. Use the inventory you have on hand to secure a loan or line of credit

(c) Copyright - Bradley E. Neider. All Rights Reserved Worldwide

cash flow management

Sales turnover and net profits may follow a rollercoaster pattern familiar to most business but when the cash flow dries up the game is over. Cash flow management is critical not just to business performance but to business survival in the days and months of a credit crunch. Accounting software can offer many solutions but there is no substitute for astute management to boost cash flow and reduce liquidity risks.

Most businesses will experience periods of lower sales and times when losses may be incurred as expenses exceed sales income. With a sound business the position is recoverable by gaining extra sales growth or reducing expenditure. A business that runs out of cash resources is dead in the water.

Debtors and sales income management

The objective is to obtain payment from customers as fast as possible improving cash flow and minimising the risk of bad debts and not being paid at all.

Payment terms offered to customers should be clearly stated and fixed as standard accounting figures according to the amount of funding the business is prepared to offer its clients. Because that is exactly what credit terms to customers is, free cash funding in exchange for eventual sales income.

Consideration should be given to using a cash discount system to encourage sales invoices to be paid faster. In some businesses it would be appropriate to obtain up front deposits and scheduled payments. Review this practise to obtain a greater proportion of payments faster to improve liquidity.

New customers should be subjected to a strict credit check. All new customers where credit check details are not available should be invoiced by the accounting function on a pro forma basis. Any businesses who fail to meet the highest credit score required should remain on a pro forma invoice basis.

Each business should determine a set of credit control procedures including issuing sales invoices, producing customer statements of outstanding balances and a standard set of credit control letters that actually get the cash in. An essential process in the credit control procedure would be to ensure the accountant or bookkeeper always issues sales invoices and customer statements promptly.

Incorporate into the terms of trade a set of rules to invoke interest payments for late payment and late payment debt recovery costs. In the UK the Late Payment of Commercial Debts (Interest) Act 1998 sets out the statutory rights of business to claim interest and costs.

Consider the possibility of factoring sales invoices due from debtors either by selling the sales invoices to a third party or raising cash on the value of those invoices pending payment. Factoring has the disadvantage of often not cheap, but does have the advantage of generating a regular flow of money.

Bad debts have a double impact on any business and all possible steps should be taken to reduce the risk. A bad debt not only uses valuable resources in chasing the debt with the negative impact on cash flow and liquidity but also is a straight loss to the net profit and a strong indicator that the accounting function is failing the business.

Creditors and expenditure management

The objective is to extend the time allowed for payment of expenses the business incurs.

Consider the frequency of all payments made to suppliers. Small business often has alternative payment terms available for the payment of taxes. In the UK value added tax can be paid quarterly or monthly, vat cash accounting can ease the tax liability due in critical periods and paye payments can be paid quarterly rather than monthly for smaller businesses.

Consider the frequency which wages and salaries are paid. A sensitive area since it involves the most important people to the business success but adopting a payment period to coincide with the receipt of cash from customers may in some circumstances balance liquidity.

General creditors are a major area to be addressed in terms of both the amount of credit received from suppliers and the time required to pay those creditor accounts. Larger orders on extended payments terms creates a risk area should the goods not be used but can greatly assist cash flow as the business is effectively borrowing free cash from its suppliers.

Stock levels are crucial to financial management of the creditor total. High stock levels use valuable working capital which is offset in part by the level of creditors. Higher levels of stock financed by free credit from creditors lowers the cash flow requirements on the other parts of the business.

Terry Cartwright is an accountant at DIY Accounting designing Small Business Accounting Software on excel spreadsheets providing complete Bookkeeping solutions for small to medium sized companies plus accounting packages producing automated copies of the Self Assessment Tax Return [http://www.diyaccounting.co.uk/Selfemployed/selfassessment.htm] for self employed business.

cash flow management

The way you manage your money is one of the first things you'll change when you move from employment to self-employment.

You are moving from an environment where you received income in equal amounts at set intervals to one where your income fluctuates.

Managing money in such circumstances is unfamiliar and, for most of us, uncomfortable.

These are some tips I developed from my experience of 10+ years of self-employment.

o KEEP GOOD RECORDS

When I first got started, an old CPA friend of mine had three words to say. "Keep good records."

Maintaining good records of your money transactions helps you in several ways.

It helps you track your income and spending so you can create a realistic budget.

Your financial records become a management tool for your business. If your records are accurate and up to date, you can track changes in income and spending - and take appropriate action, when necessary.

There's gold in those records. As a self-employed person you can deduct all kinds of business expenses. But you have to be able to substantiate them with evidence (receipts, invoices, credit card slips, mileage logs, etc.)

Lastly, keeping good financial records keeps the authorities happy when they come calling. The IRS audit rate of self-employed people is higher than almost any other group.

o OPEN SEPARATE CHECKING AND SAVINGS ACCOUNTS FOR YOUR BUSINESS.

Having separate bank accounts in your business's name does a great deal to prove to snoopy tax authorities that you are really running a business and not a hobby.

But more important, it helps you to keep your records straight.

Money you generate and spend in the process of conducting your business goes through your business account, all other money goes into your personal account.

TIP: If you are a sole-proprietor, don't intend to have employees, and don't anticipate a need for business loans, your account can be a separate personal checking account. All that is necessary is that your account be in the name of your business.

If your bank insists that you open acccount higher business costs, "will look at a credit union, where rates and terms more favorable than those of commercial banks.

o THE BANE OF FLUCTUATING CASH FLOW

Managing fluctuating income is one of the biggest challenges of self-employment.

The most difficult part of having a fluctuating cash flow is dealing with the anxiety that arises when cash flow is tight.

Most people who have been self-employed for a considerable amount of time develop a simple faith that money will flow again. But it gets uncomfortable for us, too, when the downturn is severe or prolonged.

Here are some tips on coping.

Have a marketing plan and stick to it.

Shift your spending to mimic your cash flow. In other words, spend more when money comes in, cut back when it is not. And put away some cash for a rainy day.

Keep your obligatory monthly payments as low as possible. These are the necessities that are billed monthly such as telephone and other utilities, car payments, etc.

If you must put a purchase on a monthly installment, as, say, most people do when they buy a car, opt for the longest-term loan possible.

A longer loan term lowers your required monthly payment. This makes it easier to fulfill your obligations during lean months. Pay more than is required during fat months to pay down these loans (this will reduce your total interest payments and pay off the loan more quickly).

Rather than paying for web hosting and other services on a monthly basis, opt for an annual installment that comes due during a fatter month. Not only do many web hosts give you a discount for choosing the annual option, you eliminate one payment you must come up with during a lean period.

Continued.

Ellen Zucker has been successfully self-employed for over 10 years.

Self-Employment 101: It's about making a living and creating a life! ... Observations, information and resources for those of us who are self employed or just thinking about it. [http://www.selfemployment101.com]

E-zine subscribers [http://www.selfemployment101.com/subscribe.html] can get Ellen's articles delivered to their email inbox.

cash flow management

For many small medium sized businesses, cash flow has received and will continue to receive the highest possible attention.

Why?

Simply the cash flow is the lifeblood of the business, and without a sustained positive cash flow the business may stagnate and eventually fail.

Business owners will recognize the import of a positive cash balance in their business. Decisions on new investment in areas of business development marketing, staff, plant, machinery, systems and so on are much easier to take. The investment appraisal is done, an acceptable return on investment is forecast and if cash is readily available to the business, the investment can go ahead.

However, a major problem for most business is the management of the cash.

The key aspects to control in the cash management process are the cash receivable from customers (debtors or receivables) for credit sales transacted and cash payable to suppliers (creditors or payables) for purchases made.

In many instances the sales cash receivable and the purchase cash payable account for the most significant numbers in the cash flows of businesses.

This fact will be recognized by many business owners, however, taking action to ensure appropriate systems and procedures are in place to adequately manage these two important cash movements may be found wanting.

For many small businesses, credit management may be a part-time activity or may not formally exist at all. The opportunist debtor, upon realizing that the supplier does not have a credit control system or one that is stringently enforced will seize the chance to delay settlement of his/her debt payments. This is a common practice and in many respects condoned by the selling business, because generally this action by the debtor becomes 'custom and practice' and both parties accept payments will always be late.

Why do business owners accept such an environment?

The need to have cash inflows will not be underestimated by the business owner, however, the timeliness of those inflows will all too often be compromised due to inadequate preparation in collecting the debt or for fear of upsetting a customer and losing a potential customer through pressuring the debtor for on-time payment.

A delay in securing payments on time will adversely impact the cash flow of the business, increase the working capital, increase costs through higher interest charges or reduce the interest receivable should the business hold positive cash balances.

The often overlooked costs of late payment will erode profits and potentially jeopardize future investment in the business.

Costly and increased cash flow deficits in a timely manner according to the ability of the business to pay its creditors agreed to the terms and conditions that are severely at risk.

Should the creditors of the business also be lax in their credit management, it may be possible to conveniently delay settlement until such time that the overdue debtor cash has been received.

Unfortunately it is often found that not all creditors of the business are prepared to accept late settlements. Deliveries of new orders may be delayed until settlement is made; credit limits may be reduced or even withdrawn. In such circumstances the business owner must find funding from some other source to 'bridge' the now extended timing difference between cash payments to creditors and late cash receipts from debtors.

A one-off situation may be manageable, however, if continually repeated the threat of the business downward spiraling may become reality. As a business grows the cash sums involved will become larger and the gap to bridge will be greater.

Most business owners will state that cash is king; however, its continual recognition in the day to day management of the business is not always evident.

Another adverse impact on the business of an unmanaged cash flow environment is the increasing time spent by the business owner working 'in' the business on cash management activities -typically chasing overdue monies and pacifying creditors. Time that maybe should be devoted to working 'on' the business generating growth to secure its future.

Author Bio David Willetts is a qualified accountant (Fellow of the Institute of Chartered Management Accountants) and an Associate of the Institute of Business Advisers. He has headed finance functions and held operational responsibilities within small and large organizations. He now works with directors and owners of companies in developing solutions to the problems found in business life.

More details on David�s background and experience can be found at http://www.dawconsulting.co.uk. Also if you seeking a solution to your business problem then visit David's site at http://www.sme-business-solutions.com for your on line business resource.

cash flow management