Cash Flow Management

By: Bill Cherry

Business analysts report that poor management is the main reason for business failure.
Poor cash management is probably the most frequent stumbling block for entrepreneurs. Understanding the basic concepts of cash flow will help you plan for the unforeseen eventualities that nearly every business faces.
 
Many business people don’t realize there is a difference between cash and cash flow.
Cash is ready money in the bank or in the business. It is not inventory, it is not accounts receivable (what you are owed), and it is not property. These can potentially be converted to cash, but can’t be used to pay suppliers, rent, or employees. Profit growth does not necessarily mean more cash on hand. Profit is the amount of money you expect to make over a given period of time. Cash is what you must have on hand to keep your business running. Over time, a company’s profits are of little value if they are not accompanied by positive net cash flow. You can’t spend profit; you can only spend cash.

What is cash flow anyway? Cash flow refers to the movement of cash into and out of a business. Watching the cash inflows and outflows is one of the most pressing management tasks for any business. The outflow of cash includes those checks you write each month to pay salaries, suppliers, and creditors. The inflow includes the cash you receive from customers, lenders, and investors. There is positive and negative cash flow.
If a company’s cash inflow exceeds the outflow, a company has a positive cash flow. A positive cash flow is a good sign of financial health, but by no means the only one.

A company has a negative cash flow if its cash outflow exceeds the inflow. Reasons for negative cash flow include too much or obsolete inventory and poor collections on accounts receivable (what your customers owe you). If the company can’t borrow additional cash at this point, it may be in serious trouble.
 
7 Tips for Improving Cash Flow:
There’s a golden rule in business you’d be smart to learn now: No matter how much you sell, if you don’t collect the money, you’re going to go out of business. As business owners, we often get so wrapped up in selling our products and services that we forget to take the time to ensure we’re managing our cash flow and receiving the money for those sales. But when it comes to your bottom line, you’d be wrong to simply focus on total sales dollars: You also need to focus on the cash collection of those sales.
To help get that money in the door, here are seven tips for improving your cash flow:
 
1. Require a down payment on projects so that your customers fund the project, not you.

2. Set your terms to be payment in full upon completion. Don’t extend out 30 or 60 days after you’ve completed your work. You don’t get to use your hard-earned cash until payment is received from your clients, so get it as soon as you can.
 
3. Negotiate terms with your vendors for 30 days or more so you have an opportunity to complete the work, bill your customers and receive payments prior to paying your vendor.
 
4. Have a collection process in place, and follow through. When your customers delay payments, they’re using your cash. You need to ensure that you’re being diligent in collecting from your customers.
 
5. Set up a line of credit at your bank that you can use in case of emergency. Often, lenders rates will be less than the late fees your vendors will charge. This line of credit will help you cover a lapse in cash flow for short periods of time.
 
6. Factoring of your receivables allows you to sell your receivables and get cash now instead of waiting 30 or 60 days. There’s a fee for using a factoring service, so you need to ensure that the benefits of getting cash today exceeds the cost you’ll pay for that expedience.
 
7. Minimize the amount of draws you take personally from your business. Each dollar you take from your company reduces the amount of cash flow you’ll have available for the business to grow.
 
Not all these options will work for every business–you have to consider which of these will work for your specific needs.
 
You’re never too busy to watch your cash flow:
Don’t ever think you’re too busy making sales and working in your business to worry about your cash flow. This mindset is the very thing that can put a business out of business when there’s no cash to pay the bills. So take the time to analyze your business’s cash flow to locate–and make–some small changes that will have a big impact on your cash flow. Remember, your cash flow is not the same as your profits. You can have a profitable business, but a negative cash flow. Prepare a monthly cash flow statement to ensure that you don’t get caught unexpectedly without enough cash to handle your day-to-day operations.
 
There are several components of cash flow:
A Cash Flow Statement shows the sources and uses of cash and is typically divided into three components:

1. Operating Cash Flow
Operating cash flow, often referred to as working capital, is the cash flow generated from internal operations. It comes from sales of the product or service of your business, and because it is generated internally, it is under your control.

2. Investing Cash Flow:
Investing cash flow is generated internally from non-operating activities. This includes investments in plant and equipment or other fixed assets, nonrecurring gains or losses, or other sources and uses of cash outside of normal operations.

3. Financing Cash Flow:
Financing cash flow is the cash to and from external sources, such as lenders, investors and shareholders. A new loan, the repayment of a loan, the issuance of stock, and the payment of dividend are some of the activities that would be included in this section of the cash flow statement.
 
No Matter Who Does Your Finances, YOU Should Know Basic Principles of Accounting and Finances. No one will care as much about your finances as you do. Learn the basics of accounting, ask questions.

Greater Efficiencies Equal Better Cash Flow:
According to a recent VISA survey of 458 respondents, small businesses need help collecting account receivables. Currently, the cash management issue most challenging for small businesses is receiving and collecting payments (51 percent). Small business owners’ ability to manage and move funds is the second highest ranked issue at 22 percent, followed by their concern around making payments.
 
The survey respondents recognized payment cards as a solution to improve the cash
management process. Nearly 29 percent noted that card-based payments provide greater
efficiency in receiving and collecting payments. Twenty six percent found these products offer greater ease in making payments, as well as managing and moving funds.
When looking at an ideal situation, respondents identified their primary cash management
goals as:

• Efficiency in receiving/collecting payments – 47 percent
• Reduction in administrative time – 42 percent
• Efficiency in making payments/disbursing funds – 29 percent
 
However, small businesses face a number of challenges in meeting these goals, most notably:
• Sluggish cash flow; difficulty timing payablesand receivables – 36 percent
• Labor intensive administrative work – 26 percent
• Cumbersome operational process – 14 percent
 
Nearly half of small business respondents polled (49 percent) said they would make all their company’s payments on a payment card, if all their vendors and suppliers accepted electronic payments. Of respondents who used payment cards, a significant number enjoyed improvements in efficiency and reduction in administrative time, illustrating the opportunity presented by card-based payments.
 
Financial Planning and Analysis — Break-Even Analysis
Break-even is when cash inflow equals the exact amount of expense out flow. No profit, no loss. The break-even analysis uses information from the income statement and cash flow statements to compute how much sales much be accomplished in order to pay for all of your fixed and variable expenses. Fixed expenses are expenses that you’d have regardless of the level of sales of products or services (ex, sales, rent, insurance, maintenance, etc.). Variable expenses are incurred according to the level of sales of products or services (ex, sales commissions, sales tax, freight to ship products, etc.). Break-even analysis can help you when projecting when you’ll make a profit, deciding how much to charge for a product, setting a sales goal, etc.
Financial Planning and Analysis — Profit Analysis
There are a variety of ways to help determine profitability of your business.
Budget Deviation Analysis:
You learned above that a budget depicts what you expect to spend (expenses) and earn (revenue) over a time period. Budget deviation analysis regularly compares what you expected, or planned, to earn and spend with what you actually spent and earned. The budget deviation analysis can help greatly when detecting how well you’re tracking your plans, how much to accurately budget in the future, where there may be upcoming problems in spending, etc. A budget deviation analysis report might include columns with titles:
-Planned for Month
-Actual for Month
-Difference (planned minus actual)
-% Deviation (difference x 100)
 
Credit and Collections:
One of your biggest challenges in managing cash flow may be decisions about granting credit to customers or clients, and how to collect payment from them.

Setting Up and Managing Your Bank Account:
You will need to set up a business bank account, which will include a business checking account. Banks often classify and handle business bank accounts differently than private or personal bank accounts. The following links will help you set up your account.
 
Managing Your Checking Account:
For a new business, your check register very likely will be your primary means to record and track cash. Whether yours is a new business or an established business, you’ll need to know how to manage your bank account.
 
Managing Cash Flow:
As a new business, your biggest challenge is likely to be managing your cash flow — probably the most important financial statement for a new business is
 the cash flow statement. The overall purpose of managing your cash flow is to make sure that you have enough cash to pay current bills. Businesses can manage cash flow by examining a cash flow statement and cash flow projection. Basically, the cash flow statement includes total cash received minus total cash spent. Cash management looks primarily at actual cash transactions.

Accounting Software:
There is a number of good accounting software available for your use:
-QuickBooks 2006 (Windows or MAC)
-Microsoft Office small Business Accounting 2006
-Simply Accounting
-MYOB Business Essentials
-Sage Peachtree Complete Accounting 2006