It's a Juggling Act

In today's tough economic environment, one major concern for many businesses is maintaining a healthy cash flow.

If your company is feeling the squeeze of a tight economy -- and tight credit -- its ability to manage cash flow is critical. Enterprises that successfully practice good cash management generally survive and prosper; those that don't are likely to be undone by the weight of increasing debt and the inability to pay employees and suppliers.

The Cash Cycle: How Many Days' Cash Does Your Company Need To Keep Operating? It may help to think of the cash flow process in terms of the cash cycle, which is the amount of money your company needs in terms of days to keep operating. Assume your business had the following financial statistics at the end of its most recent fiscal year: Annual sales  $3,600,000 Annual cost of sales  $3,285,000 Billed accounts receivables  $   600,000 Unbilled accounts receivables  $   400,000 Accounts payable and accrued expenses  $   450,000 The first step in calculating the cash cycle is to determine the amount of average daily sales and the cost of sales. Divide sales and cost of sales by 365 days to give you average daily sales of nearly $10,000 and average daily cost of sales of $9,000. Then, calculate the number of days' investment in billed and unbilled accounts receivable: Billed accounts receivables  $   600,000 Plus unbilled accounts receivables $   400,000  Subtotal  $1,000,000 Divided by average daily sales  $10,000 Number of days investment        100 So it takes 100 days on average between production of a product or service and payment. Similarly, using the daily cost of sales average, you can determine the number of days financed by vendors and employees:  Accounts payable/ accrued expenses   $360,000 Divided by daily average cost of sales  $   9,000 Number of days financed          40 The 60-day difference between the investment and the financing is your company's cash cycle, or the length of business activity your enterprise must finance to stay in business. Convert the figure to dollars by multiplying the cash cycle (60) by the average daily cost of doing business ($9,000) and you see that you need to invest $540,000 to support your company's operations.

A healthy cash cycle requires some cash flow forecasting. This helps plan your cash balance and answer questions such as: When will you need to borrow during the year? When will there be surplus cash to invest? A cash flow forecast is usually done for one year or a quarter in advance and divided into months or weeks. For companies that are barely making ends meet, a daily cash flow forecast may be needed.

Cash flow is the heartbeat of your business and keeping it stable requires juggling most aspects of your operation, including accounts receivables, payroll, credit and inventory.

With that in mind, here are a dozen strategies to strengthen your company's cash flow:

1.

Take the maximum time to pay your suppliers. Essentially this amounts to an interest-free line of credit and gives you more time to use your working capital.

2.

Check to see if your suppliers offer payment incentives. Some companies offer a discount for paying early. Even if your business regularly purchases a substantial amount from another company, you're in a good position to negotiate favorable payment terms. In addition to early payment incentives, ask for special terms that accommodate your cash flow requirements. For example, negotiate to make payments after your busy season.

Many suppliers are willing to offer incentives in order to speed up their own receivables and cement long-term relationships with good customers.

3.

On your end, offer customers discounts to early payers. Consider providing a one to two percent discount if bills are paid within ten days of delivery. It may cost you a little, but it can also light a fire under slow payers -- and have a major positive effect on your cash flow.

4.

Examine payment terms and your billing schedule. If possible, send an invoice with your shipments -- not separately afterwards. Waiting until the end of the month can add as many as 30 extra days to your cash flow conversion period. If your business provides a service and it is appropriate, ask customers for a deposit before work begins.

Remind customers of your credit terms. Check your invoices or statements to ensure there is a clear indication of when payment is due. Encourage customers to pay with fund transfers or Internet payments.
 

5.

Closely track and collect overdue accounts. Have your accounting department prepare fast, accurate reports on overdue payments. Monitoring accounts can reveal early warning signs. Act immediately on past-due accounts and use a collection agency if necessary. Telephone tardy customers and obtain a payment commitment by a specific date. Consider giving staff members financial rewards when they collect long-overdue bills.

Don't keep delivering services or shipping goods when payments are far behind. Put problem customers on a C.O.D. system or stop shipments altogether.

6.

Consider establishing an interest penalty for late payments. Once a bill becomes seriously overdue, you may have to resort to penalties. While you can -- and should --sympathize with hard-pressed customers for a reasonable amount of time, don't let their problems drag your cash flow down.

7.

Don't extend credit without taking the proper precautions. Require all new customers to fill out credit applications. Request and check credit references.

A written agreement at the onset of a business relationship can help avoid misunderstandings later on. Spell out the terms of the arrangement on your credit application. You might want to go one step further and have customers sign a separate statement or contract identifying not only when payments are due but also that the other party is liable for any legal or arbitration costs if a bill is not paid.

If your business is extending credit to a financially troubled company, insist on securing personal guarantees from the owners, as well as their spouses.

8.

Trim expenses and cut unnecessary spending. Look for ways to reduce waste in office supplies, company vehicles, cell phones and land lines, utilities, business travel, overtime pay, insurance, and more. Ask your employees for cost-cutting suggestions. They are likely to come up with ideas management hasn't thought about.

Dispose of unused vehicles, vacant real estate and machinery you don't need. You could be paying insurance, maintenance and storage costs on them. Selling idle assets can result in a cash flow boost while donating to a qualified charity can be a tax-wise move.
 

9.

Keep your inventory lean. As a rule of thumb, the expense of maintaining stock in inventory averages about two percent of the cost of those goods for each month not sold. If your business carries an item for a year, you're down 24 percent. It's hard to overcome this kind of cost handicap -- especially in hard times.

Don't fall into the trap of hanging onto slow-moving inventory in order to avoid admitting you made a mistake. Cut your losses on old and outdated inventory items. Or donate them and claim a charitable tax deduction.
 

10.

Speaking of tax deductions, look for valuable opportunities you may have overlooked. The complex Internal Revenue Code is filled with breaks for various industries and taxpayers in certain situations. Consult with your tax adviser to see if there are potential opportunities or steps you should take by the end of the year to reduce your tax bill.

11.

Free up cash by leasing rather than buying. Leasing computer equipment, cars, facilities, tools and other gear generally costs more than buying, but you avoid tying up cash. You can also limit your exposure with short-term leases.

12.

Examine prices. Many company owners and executives won't consider increasing prices in a tough economy because they're afraid customers will head to the competition. But it may be necessary if your prices aren't keeping pace with expenses. If you do raise prices, explain the reasons to your customers, and if possible, give them notice. Emphasize the value of your products or services.

These ideas are just some of the ways your company can improve cash flow. Consult with your accountant who can help you review cash flow statements, find weaknesses, and come up with solutions to maintain a healthy balance between the money flowing in and out of your organization.