These four steps will help you keep track of the money coming in and out of your growing company:
Measuring cash flow: Prepare cash flow projections for the following year; the following quarter - and if you’re on a shaky ground - the following week. An accurate cash flow projection can alert you to trouble way before it strikes.
Understand that cash flow plans are not glimpses into the future. They’re educated guesses that balance a number of factors including your customers’ payment histories, your own thoroughness at identifying upcoming expenditures and your vendors’ patience. Watch out for assumptions without justification that receivables will continue coming in at the same rate they have recently been; that payables can be extended as far as they have in the past; that you have included expenses such as capital improvements, loan interest and principal payments; and that you have accounted for seasonal sale fluctuations.
Start your cash flow projection by adding cash-on-hand at the beginning of the period with other cash to be received from various sources. In the process, you will wind up gathering information from salespeople, service representatives, collections, credit workers and your finance department. In all cases, you’ll be asking the same question: How much cash in the form of customer payments, interest earnings, service fees, partial collections of bad debts and other sources are we going to get in and when?
The second part of making accurate cash flow projections is detailed knowledge of amounts and dates of upcoming cash outlays. That means not only knowing when each penny will be spent, but on what. Have a line item on your projection for every significant outlay, including rent, inventory (when purchased for cash), salaries and wages, sales and other taxes withheld or payable, benefits paid, equipment purchased for cash, professional fees, utilities, office supplies, debt payments, advertising, vehicle and equipment maintenance and fuel, as well as cash dividends.
Improving receivables: If you got paid for sales the instant you made them, you would never have a cash flow problem. Unfortunately, that doesn’t happen, but you can still improve your cash flow by managing your receivables. The basic idea is to improve the speed with which you turn materials and supplies into products, inventory into receivables and receivables into cash. Here are specific techniques for doing this:
Offer discounts to customers who pay their bills instantly.
Ask customers to make deposit payments at the time orders are taken.
Require credit checks on all new non-cash customers.
Get rid of old, outdated inventories for whatever you can get.
Issue invoices promptly and follow up immediately if payments are slow in coming.
Managing payables: Top-line sales growth can conceal a lot of problems - sometimes too well. When you are managing a growing company, you have to watch expenses carefully. Don’t be lulled into complacency by simply expanding sales. Any time and any place you see expenses growing faster than sales, examine costs carefully to find places to cut or control them. Here are some more tips for using cash wisely:
Take full advantage of creditor payment terms. If a payment is due in 30 days, don’t 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 tCarefully consider vendors’ offers of discounts for earlier payments. These can amount to expensive loans to your suppliers, or they may provide you with a change to reduce overall costs. The devil is in the details!
Don’t always focus on the lowest prices when choosing suppliers. Sometimes more flexible payment terms can improve your cash flow more than a bargain-basement price.
Surviving shortfalls: Sooner or later, you will find yourself in a situation where you lack the cash to pay your bills. This doesn’t mean you’re a failure as a businessperson - you’re a normal entrepreneur who can’t perfectly predict the future. And there are normal, everyday business practices that can help you manage the shortfall.
The key to managing cash shortfalls is to become aware of the problem as early and as accurately as possible. Banks are wary of borrowers who have to have money today. They’d much prefer lending to you before you need it, preferably months before. When the reason you are caught short is that you failed to plan, a banker will hardly be interested in helping you out.
If you assume from the beginning that you will someday be short on cash, you can arrange for a line of credit at your bank. If bankers won’t help, turn to your suppliers. These people are more interested in keeping you going than a banker and they probably know more about your business. You can often get extended terms from suppliers that amount to a hefty, low-cost loan just by asking for it. That’s especially true if you’ve been a good customer in the past and kept them informed about your financial situation.
Ask your best customers to accelerate payments. Explain the situation and, if necessary, offer a discount of a percentage point or two off the bill. You should also go after your worst customers - those whose invoices are more than 90 days past due date. Offer them a steeper discount if they pay at that moment.
You may be able to raise cash by selling and leasing back assets such as machinery, equipment, computers, phone systems and even office furniture. Leasing companies may be willing to perform the transactions. It’s not cheap, however, you could lose your assets if you missed lease payments.
Choose the bills you’ll pay carefully. Don’t just pay the smallest ones and let the rest slide. Make payroll first or else unpaid employees may soon be ex-employees. Pay crucial suppliers next. Ask the rest if you can skip a payment or make a partial payment.