7 Secret Weapons for Cash Flow



Cash flow is an occasional skirmish for some companies; for others, it’s an ongoing war. Results from a Federal Reserve Bank report (March 2016) show that about 22% of small businesses surveyed have cash flow as their #1 challenge, ranking higher than business costs, government regulations and taxes.

What to look for when evaluating cash flow
Dashboards and accounting systems make it easy to evaluate cash flow by looking at ratios. But don’t let ratios drive excitement or depression; ratios are just a snapshot in time of short and long term business and industry trends. Monitor the following to get a true picture of available funds:

  • Current and projected cash flow statements summarize the actual amounts of all sources and uses of cash in the business, and properly adjust for non-cash items (e.g., principal portion of loans and depreciation) that impact net income but not cash flow.
  • Key cash flow ratios and other metrics play an important role. Examples include: knowing a company’s Fixed Cash Burn amount (monthly fixed expenses just to stay in business) or the Average Collection Period (how long the company takes to collect on invoices).
  • It’s also important to understand business operations, including accounts payable and accounts receivable terms, the impact of seasonality, and the current and projected timing of the industry cycle.

Here are 7 tips for managing the time gap between paying bills and receiving money from customers:

1. Establish good relationships with vendors. Seek out early payment discounts.  Know which vendors are willing to be flexible, and ask for extensions when necessary. Don’t wait too late to talk with vendors and always explain any payment delay. A company’s payment history ‘trains’ vendors when to expect payment.

2. Encourage quick payment from customers. Shorten the due date cycle; ask for 15 day payments instead of 30. Encourage customers to pay early with small percentage discounts or other tangible incentives.

3. Set aside a rainy-day fund. Look at historical information; when and by how much was the company short last year? Identify one-time expenses and predict upcoming one-time hits. It’s ok to start slow. Just get started with one month, and build up to 2-4 months reserve. The money isn’t just for making payroll, but rather to remain strong and grow during downturns or even to acquire other companies.

4. Open a line of credit. It’s not a good idea to rely on line of credit financing, but it is a good idea to have a pre-approval on getting a line of credit so it’s there and ready, should the company need it. A line of credit is relatively cheap money that needs to be managed efficiently or runs the risk of creating problems down the road.  The best time to borrow money is when the business doesn’t need it.

5. Keep a close eye on sales forecasts. Realistic expectations and knowing what’s ahead should be the basis for planning expenses. Remember to plan for tax payments that are due several times of year.

6. Negotiate payments based on receivable data. For example, if most of the monthly revenue comes in during the first two weeks of the month, request a 15th of the month date for the rent payment instead of the 1st. It may also be a good idea to process payroll monthly, rather than twice a month (Be aware that legal requirements vary from state to state on this issue.)

7. Be strategic and carefully time acquisitions. Take time to research before adding equipment. Talk with several companies to be certain that the equipment purchase or lease is the right equipment for the job – no more and no less than necessary. Estimate the business cycle by asking, “Will we need this equipment in 5 years? Do we want to own the equipment, or just use it?” Renting equipment may be more expensive now but less risky in the long run if the business cycle changes.

Successful business owners are always mindful of these financial truths:

  • Distributions shouldn’t exceed cash flow from operations; the owner must not take too much out of the business.
  • Fixed asset investments tie up cash.
  • Loan payments impact cash flow. Debt service may eat into company sustainability.

Business owners have many issues competing for their time throughout each day. A smart business owner must consider a big picture view of the company, make policies that manage cash flow, and periodically review Key Performance Indicators. A good manager implements the above strategies to keep a company advancing without losing the battle due to poor cash flow management.