Business Challenge of the Week – Are you managing your cash flow or is it managing you?

July Theme – Cash and Profits

So far we’ve covered the following challenges for July:

Is your company prepared to get financing?

Are you prepared to use your profits strategically?

Preparing for Profits

While profits are great, you can’t pay your bills or employees with profit.  You need cash.  An important piece of advice almost all business owners hear is, “Whatever you do, don’t run out of cash.” Sounds reasonable, but what does it really mean and what can you do to make sure your cash flow is healthy?

You challenge this week is to determine if there are any ways you can improve the cash flow in your business.

First of all let’s define cash flow.  Cash flow is the measure of cash coming into and going out of your business. If your cash flow is positive, then you are taking in more cash for a given period that you are spending. If it is negative, then you have spent more in a given period than you have taken in.

Sources of cash for a typical business include:  Cash from sales of your product or services for the period will probably be your primary source. Another source is collections in the period for sales made in a previous period. Other possible sources are income from investments or other cash infusions into the business (debt or equity).

Where most businesses spend their cash:  Purchases of raw materials, tools, and parts (if you are manufacturing or assembling a product), wages, rent, and other operating expenses (payroll expenses, supplies, advertising, professional services, telephone, utilities, for example), interest expense, loan repayments, and any other expenses incurred and paid by the business for the period. Capital expenditures (generally, expenditures for long-term assets) are another possible area of spending.

Here are three simple rules for managing and improving cash flow:

  1. Sell more products and services.
  2. Collect cash from those sales as quickly as possible (faster collection of Accounts Receivable).
  3. Delay cash payments as long as possible (slower payment of Accounts Payable) without breaching integrity.

For this challenge I want you to focus on taking actions that support #2 and #3 since selling more is a marketing strategy.   Listed below are some things to review and determine which ones you are currently doing and which ones you can begin to incorporate.

Collect cash as quickly as Possible 

  • Ask customers to pay sooner by changing your credit period.
  • Offer discounts to customers who pay early.
  • Require credit checks on all new non-cash customers, and do not sell to those with unacceptable ratings.
  • Issue invoices promptly and, if payments are slow in coming, follow up immediately.
  • Ask customers to make deposit payments at the time orders are taken.
  • Make sure invoices are accurate and easy to understand.
  • Track accounts receivable to identify and avoid slow-paying
  • customers.
  • Understand your customers’ payment cycle, and time your invoices to coincide.
  • Institute a policy of cash on delivery (c.o.d.) as an alternative with slow-paying customers.

Delay cash Payments as long as Possible Without Breaching Integrity

  • Take full advantage of creditor payment terms, or ask for extended terms. If a payment is due in 30 days, do not pay it in 15 days.
  • Use electronic funds transfer to make payments on the last day they are due. You will remain current with suppliers while retaining use of your funds as long as possible.
  • Communicate with your suppliers so they know your financial situation. If you ever need to delay a payment, you will need their trust and understanding.
  • Carefully consider vendors’ offers of discounts for earlier payments. These can amount to expensive loans to your suppliers, or they may provide you with a chance to reduce overall costs.
  • Do not always focus on the lowest price when choosing suppliers. Sometimes more flexible payment terms can improve your cash flow more than a low price.

Understanding how cash flows into and out of your business is essential in order to survive. Managing this cash flow correctly will let you build a cash reserve and identify cash shortfalls before they become critical.

To Your Success,

Bruce Rector

The Rector Group

Tel: 954-356-0439

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