Even though we are living in a credit centric time where cash management is becoming more of an after thought, the power of cash or being in a cash position is and will always be considerable for those that know how to properly manage cash.

When I’m talking about cash, it can be actual cash in the bank or a revolving line of credit that has funds available against the approved limit.

In either cash, we are talking about the lowest cost form of money you have at your disposal and how you should be managing it.

When I speak of getting the most out of cash, its based on having a good working understanding of what the cash flow will look like over a period of time as well as cost/benefit relationships between receiving cash and making cash payments.

Everything thing in any business can be boiled down to two things … time and money. Everything you earn and spend will result in a cash transaction at some point in time. Everything you acquire or need to repay will have a specific payments required at a closing rate or scheduled payment date.

By understanding the expected inflows and outflows of your business in sufficient detail, you can determine how to best utilize cash to get more than face value.

For instance, paying suppliers within a discount period may provide a greater return on cash than buying an asset for cash that could have been partially or completely financed.

Collecting money sooner than later provides more cash in hand to apply in the business, but what types of cash or non cash incentives have to be provided to do so?

The first step in any form of serious and worthwhile cash flow management is to complete a cash flow forecast.

I recommend that any business forecast the future inflows and outflows of their business for at least 90 days, and turn it into a rolling forecast by updating it at least once a week, adding an additional week into the future and carrying forward and/or adjusting inflows and outflows that have not been resolved on schedule. Also, cash forecasting should be done in weekly time segments as monthly segments are too long an interval to match up inflows and outflows.

By going through this exercise at least once a week, you have a much better perspective of the cash that’s going to be available at any point in time as well as when cash may be short or in jeopardy of being short.

This can be extremely useful in situations of business distress and business growth.

In situations of distress, its going to be important to understand exactly when all commitments are going to be coming due, which ones can wait, which ones will require some servicing, and so on. Its going to be important to make sure that funds are available every pay period to pay salaries, otherwise everything will quickly grind to a halt.

In situations of growth, more capital may be required to fuel growth in the form of more inventory, more equipment, more working capital, more accounts receivable.

Properly utilizing cash to keep the balance sheet in order and leveraging cash to its fullest to secure cheaper forms of business financing can be instrumental in funding growth.

But getting greater mileage out of cash starts with weekly cash flow forecasting, months into the future.

The sooner you start to incorporate this type of discipline to your weekly routine, the sooner you will start seeing the benefits.

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Cash flow management can mean a bunch of different things, but in its simplest form, its all about allowing profitable sales to occur on a timely basis while minimizing out flowing cost amounts and improving the timing of inflows and outflows.

Here’s one example that touches on all of these areas and is over looked by many businesses.

A company is in a growth mode in an industry where they are in the middle of a distribution channel.

Even though the company has a strong balance sheet, credit, and cash flow, they can’t find a bank to finance their growth plan as many institutions, especially these days, are cautious towards anything moving too fast. In order to maximize revenues with the credit available, trade credit is stretched out to the max, forgoing all discounts, eliminating potential credit limit increases, and potentially harming credit overall.

The company turns to asset based lending and gets their accounts receivable factored at the god awful rate of 18% per annum, plus transactional fees. Sales double as there is now enough cash flow to cover the gap between collecting money and paying the bills. Trade credit discounts are taken full advantage of also causing credit limits to increase.

The net effect is that the business not only more than doubles its profitability as more sales are being spread over the fixed costs, but the trade credit discounts along are enough to pay for the incremental cost of financing that was created from going from bank margining of accounts receivable to factoring.

Obviously this exact scenario isn’t going to hold true for all companies. The point here is managing cash flow is about generating more net income for the business at the least amount of cost. The least amount of cost doesn’t mean you can’t use higher priced debt to fuel your business financing needs. What it does mean is there ways to gain cost savings in one area to offset increases in another where the net overall effect is going to be positive to the business bottom line, balance sheet, and cash flow position.

The example cited above occurs more often than you might think in growth markets and in some cases the trade discounts generated through more available cash flow are actually greater than the higher cost of asset based debt, driving profit to the bottom line due to use of the higher priced money.

I’m not advocating here that higher priced debt is good or bad. This is about what’s relevant to a particular situation and what net impact available capital will have on a growth situation, regardless of the cost.

If the results are positive, press on and grow the business, all the while looking for cheaper sources of money.

If the results don’t add up, then twist the rubic’s cube in other directions and see if you can find another angle to improve cash flow and profitability.

Click Here To Speak With Business Financing Specialist Brent Finlay

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Its also safe to say that most businesses have room for improvement when it comes to managing cash flow as it tends to be looked at as a secondary activity to running the day to day business in many cases.

For a business that is highly profitable, cash flow improvements are focused on the money left on the table that could be used to increase profits.  For struggling businesses, better cash flow management can been the difference between survival and business financial failure.  And for the more middle of the road business scenario, having timely access to cash can have a profound impact on a company’s ability to take advantage of new opportunities when they are presented.

There are three basic elements to the cash flow management process.

First, there is the actual forecasting and tracking of all cash inflows and outflows that are expected or known to the business.

Second, there is having in place any debt or equity capital in place that is required to allow the business to operate in a solvent state.

Third, the profits generated by the business which result in an increase in cash require a strategy to optimize the return on this highly liquid asset.

Of the three elements, forecasting and tracking tends to be the one that requires the most attention and improvement.

Here are some best practices to consider for any going concern business.

• When developing a forecast, the time period needs to be relevant to all the various payment requirements the business has.  Because expenditures can be staggered all through the month, forecasting should be done on a weekly basis, not a monthly basis.  In some extreme cases where there is a high volume of daily transactions, it may need to be projected out by day of the week.
• The tighter the cash flow, the more it becomes necessary to  include everything in a cash flow forecast above what value you consider to be material.  For instance, materiality may be set at $500.
• Cash flow should be projected out at least 6 months and then maintained at that point over time.  For greater accuracy, cash forecasting can be done over a longer period of time by month, say at least one year, and then broken down into weekly increments for the next two months to provider a longer term view of expected future events.
• The ending weekly projected net cash flow balance can never be negative.  The whole point of the exercise is to develop a cash flow plan where inflows plus the opening balance cover outflows.
• The tighter the cash flow, the more attention it will require.  Regardless of the stress on cash in a business, cash flow projections should be updated at least once a week.
• Conservatism should be utilized to show outflows taking place when required, inflows being delayed, and a cash flow buffer or reserve in place for unplanned activities requiring cash or cash forecasting errors.
• The master cash flow should be prepared and monitored by one person to maintain its integrity and accuracy.  This person must be involved in decisions related to cash so that all trade offs can be properly considered by the decision maker.

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A recession impacts the money supply and the flow of cash through the economy.

When one area of the economy becomes cash flow constrained, the impact will slowly ripple through the rest of the economy through the related connection points.

On more of a micro level, this has the potential to impact businesses of all sizes from several different directions.

First, the business could have its commercial credit reduced by its lender or pulled completely if the lender goes out of business, which they are in record numbers.

Second, the business may not be able to access new credit for upgrades or growth, impacting its ability to perform.

Third, sales may be down to the point that fixed costs are not being covered off and cash flow injections are required.

Fourth, customers may become slow to pay or default payment.

Fifth, vendors may cut back on credit or reduce their own product line of goods the business requires.

All these and other scenarios can create negative impacts to the cash flow.

The most damaging aspect to these ripple effects is that you may not see them coming until its too late to do anything about it, or at the very least, leave you scrambling to address the problem.  When you’re hit with multiple issues from different directions, the impact can be exponential in nature.

This is where proactive cash flow management has become critical in the current business environment.

As a business owner, the goal is to reduce risk where ever possible to assure the long term profitable survival of the business.  Proactive cash flow management has now gone beyond accurate forward projections on inflows and outflows and now must include greater diligence into what could potentially happen to the business and how to mitigate the potential unforeseen risks.

And cash flow protection is likely going to cost additional money, but the alternative of not being proactive can cost substantially more.

Examples of more proactive measures could include:

• Accounts receivable financing for larger customer accounts.
• Credit reviews of existing customer accounts and a review of credit granting policies to new customers.
• Applications for credit with additional vendors.
• Development of an additional vendor list even if credit is not available.
• Internal operating cost reduction strategies.
• Inventory reductions.

Most business owners are too busy with their businesses to believe they need or have time for any of these activities.  The assumption is that if they get in some sort of cash flow bind, they can borrow their way out of it.

The reality is that business financing for distressed cash flow is a hard ticket to come by these days and some of the forms it comes in if you can find it are very pricey.

The recession is far from over.  Financial markets are basically in disarray and have become completely unpredictable.

Whether you get hit by the storm or not isn’t the issue.

Whether you can survive a hit or multiple hits is.

Click Here To Speak With Business Financing Specialist Brent Finlay

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For business financing, there are three basic levels of financing.  The first level is for “A” credit and where corporate finance mostly lives.  Then there is the “B” level or sub prime level for slightly higher risk situations followed by the “C” credit level which is asset based lending.  There can be forms of asset based lending that are more A or B in nature, but for the most part asset based lenders lend strictly on the liquidation value of the assets.

In March of 2010, the “A” type lenders are still largely sitting on the fence and not lending out much money.  Most of their time is being spent trying to figure out what to do with all the customers that are behind or offside with their financing covenants.

The C lenders are lending, but the rates are high, and because their is so much used equipment and real estate flooding the market, the assessment of liquidation value, upon which the amount of financing that can be provided is determined, is very low producing much lower amounts of capital than the business owner is expecting in most cases.

And then there’s the B, or Sub debt lenders, who have basically vanished from the scene.

So right now, if you’re a business that just come off a bad year, but have pretty good options ahead of you, the types of financing options available to you are going to be limited.   In most cases, the only options that are actually lending money will be asset based lenders, and they will be taking a big bite out of your available equity with large debt service costs.

Business owners, for the most part, have not adjusted to this market shift and are still looking for cheaper money that isn’t available right now.  It is a hard decision to take on higher priced debt, but if you can make the math work in your cash flow, 2010 may be more about survival than profitability.

If you are in need of business financing, give me a call and we can discuss your options in more detail.

Click Here To Speak With Business Finance Specialist Brent Finlay

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So when there is less cash to go around and choices are going to have to be made as to who gets paid and who doesn’t, here are some things to consider.

First, build out a cash flow plan that identifies the available amount of money you are likely going to have to work with once you allow for all essential expenses including your payroll.

Next, proactively talk to your trade creditors and outline to them your plan to get them paid.  They may not like what you have to say, but they’re going to be more likely to work with you if you ask versus just surprising them by not paying without an proactive explanation.

Third, think twice about getting behind with your government remittances, especially payroll deductions.  Government agencies have the right to seize your bank account and contact your customers for repayment of accounts receivables.

While it may seem like the obvious choice to short pay government agencies, be careful with this tactic because of the power to collect these agencies have.

Fourth, update your cash flow projections on a regular (at least weekly basis) and make adjustments to your plan as required.  Nothing ever goes according to plan, especially when it depends on the actions of others, so continually develop a new base line to work from, make adjustments to your plan, and communicate any changes as required to parties you owe money to.

Fifth, if you need to dip into personal credit cards, at least make the minimum payments to minimize the damage to your credit rating.  High credit utilization will bring down your credit, but it will quickly bounce back once your balances are paid down.  Late payments of greater than 30 days on the other hand, can have a devastating impact on your credit that can last for years.  If you eventually need to refinance, keeping your credit in tact will become important to avoid the lowest forms of credit.

Most payment trade offs are judgment calls that are better made and managed when you develop intimate knowledge of your cash flow and maintain close communication with your creditors.

Here’s where you can go to get more information on business financing.

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First of all, Happy New Year to everyone.

The page has turned and we are now into a 2010 business financing environment, quarter number one.

Now many of you may ask, what difference does a few days make from the end of December, 2009 to the beginning of January, 2010?

While the differences may be subtle to some, there is a definite shifting of gears from a business finance point of view and can have a significant impact on your ability to secure capital and your cash flow management.

If you’re either in the process of securing business capital, or just starting and you have a December 31st year end, many lenders will not provide you with an approval for funding until your Dec. 31, 2009 financial statements are completed.

Yes, even though the required filing of your annual statements is probably not until the end of June, 2010 (depending on your country of tax jurisdiction), your chosen source of financing may require you to do it much sooner.

Once the calendar turns to January, accounting firms enter their busiest period of time related to December fiscal year ends and personal income tax filing requirements.  So if you need your business financial statements done quickly, you’d better get the work booked with the accountant as quickly as possible and also make sure that you have all your own information up to date so that the process does not get delayed.

For Debt lenders that have December 31st year ends, January marks a new fiscal period of them as well where they will have new budget targets and potentially new programs and lending criteria to apply.  The key point here is that whatever they were doing in December with respect to loan approvals can be very different in January.

Banks and other debt lenders are going concern businesses trying to manage their profit pictures and balance sheets just like everyone else.  So if a debt lender with a Dec. 31st year end enters their last quarter below budget and targets, they are likely going to be more aggressive in their lending practices in the last quarter, all things being equal.

If the lender is way ahead of targets in the last quarter of 2009, they may become very conservative in their approval process for the remainder of the year in an effort to bring higher quality loans onto the books that will improve the risk rating of the overall portfolio.

On the flip side, the start of a new year can trigger a conservative lending approach whereby lenders try to see if there are enough low risk deals out in the market place to meet their goals.  If this doesn’t prove to be the case, then lending criteria will likely loosen up in Q2 and Q3.

There will also be lenders that have January, February, and March year ends where the same type of thinking can apply in each case as managers work to hit their numbers.

In business financing, timing is everything and when the year changes over, there are likely going to be some noticeable differences that will impact your capital procurement efforts.

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As 2009 draws to a close, cash flow management is still a high priority for most small businesses these days due to the ongoing impact  of the current recessionary forces.

In order to preserve cash and get more purchasing power, here are some small business cash flow management tips to consider if you’re not already doing them.

Equipment Leasing.  Now a days you can get equipment leases for just about anything over $1,000 in value.  If you have good credit, you can secure some pretty attractive leasing rates and if you’re buying something that offers a manufacturer sponsored program, the financing costs can be extremely low.

You still have to crunch the numbers to see what comparable products are worth from other suppliers as its a common strategy to give you a great financing package and then jack up the price to offset what the seller is subsidizing on the equipment financing side.  But in a recession, where sales are down, you may be surprised at the opportunities that exist for both a great purchase price and a great financing package.  In some cases, it may even be cheaper than just paying in cash.

Ultimately, there is going to be a net cost for financing, likely, but if you’re taxable, there is a tax deduction to be had and when the interest rates at all time lows like they are right now, a small cost of financing that allows you to maximize your available cash is definitely something to consider.

Equipment leases offer other cash advantages as well, especially for businesses with good to great credit.   In most cases, you will be able to buy assets for no money down except for one or two lease payments paid in advance.  This high degree of leverage again conserves on valuable cash flow.

I’m not going to get into the operating versus capital lease discussion other than to say that an operating lease needs to provide some significant benefit to you because it will cost more per dollar financed than a capital lease.  With a capital lease, you basically agree to purchase the asset at the end of the lease from the lease company and you agree to do this at the time the lease is entered into.  Capital leases tend to provide you with the lowest cost financing options as there is no back end risk to the leasing company.

Additionally, regardless of your credit rating, equipment leasing defers the related sales tax associated with the purchase meaning that you only pay sales taxes on your lease payments when they come due versus having to pay 100% of the sales taxes at the time the asset was purchased in a cash transaction.

And if you get the chance to get a great deal by making a cash purchase, get the deal done, then go to an equipment leasing company, sell them the asset and take back a lease (sale and lease back).

Equipment financing companies will allow you to do this up to 6 months after purchase and they will even consider private sale transactions.

This way, if you have the available cash, you can negotiate hard and get the best deal without having to try and arrange financing at the same time.  If you’re concerned about being able to qualify for credit after the fact, you can go and get pre-qualified for an equipment lease for the amount of money you’re looking to spend and the type of asset you want to acquire.

Equipment leasing can be a very effective cash flow saving strategy.  To get the best use of this tool, make sure that you always crunch the numbers to  determine the best approach to maximize both the cash flow savings and purchasing discounts.

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Being that we are now in the first week of December,  many business owners with December 31st year ends will be or should be projecting what their financial statements will look by the end of the month in order to have the opportunity to improve the final results in the coming weeks.

Traditionally, a year end planning process is for taxation, and taxation purposes only.  While tax planning is definitely something that should be seriously looked at this time of year if you have a December year end, there is another aspect of business finance that is mostly overlooked in the process by both business owners and their accountants.

The year end financial statement that typically gets prepared up to 6 months past the end of the actual year end, is a very important and arguably the most important element of a business financing package for an existing business.

Sometimes in the pursuit of reducing income taxes at any cost, business owners create other problems for themselves in the areas of securing capital or maintaining the capital they now have access to.

For an oversimplified example, business financing problems can be created by income statements that show no or low profitability and balance sheets that show no or low retained earnings.

In many cases, year end tax planning activities will occur to either spend more on future needs to reduce the net tax position at year end or move profits out of the company to optimize both the business and personal income tax positions of the owner(s).

While these types of actions may very well result in considerable taxation savings, they also end up painting a less than flattering financial picture for the business for the period just completed.

Logically, one could argue that lender or investor would be able to understand these actions and take them into consideration when reviewing the financial statements.  Unfortunately, logic doesn’t have much to do with it.  The financial statements are in almost all cases related to business financing, taken at face value.

As a result, two potentially negative outcomes can occur.

First, for the business that currently has business financing facilities in place that require specific financial covenants to be upheld, the year end tax planning activities can potentially cause a business not to meet some of the covenants which could result in the lender calling in the loans or taking some type of corrective action.

Second, for a business trying to secure incremental capital, the year end financial statements may not show the ability to repay the debt or show a debt to equity position that can support a greater level of borrowing.

Both of the above scenarios can be disastrous to a business, where at the least significant opportunity is forgone, or at the worst, the business cannot cash flow its operations and ends up closing down or going bankrupt.

To avoid both scenarios, the year end planning process, either for a December 31st year end, or for any other year end date, needs to take into account how the final version of the financial statements will impact all business finance aspects of the business (taxation, cash flow management, ability to secure capital, and so on)

To some degree, taxation can actually be looked at as a financing cost, as failure to pay taxes or have taxable earnings, may limit or restrict the business from acquiring and maintaining business capital, especially lower cost debt instruments.

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Cash Flow Management Actions To Consider

When news breaks about a recession coming or present, perception becomes reality as consumers and business owners start to change their spending habits and prepare for what may lie ahead. In effect, the recession becomes a more prolonged reality because we make it one through our actions.

The primary action by consumers taken is lowering on expenditures, especially on non essential purchases or on larger items that can be put off for awhile.

Ok, so this is nothing earth shattering.

But as a business owner or manager, how do you choose to react to what is unfolding? Its hard to know how the collective recessionary impacts will ripple through an industry or sector with respect to timely and collective magnitude. So how do you decide what actions to take and what to prepare for?

Unless, you have little or no debt and have some sort of cash reserve at your disposal, I suggest considering some or all of the following.

Quoting Intel’s Andrew Grove, “Only the paranoid survive”. And from one of my former type AAA colleges, “in life, you can be homicidal or suicidal, I choose the former.” Point here is that its better to prepare for the coming storm, expect it will reach you directly, and take all necessary measures available to you to survive the impact.

This may seem a bit dark and paranoid (and it is). And there is a chance that a recession does not have a material impact on your business. But what if it does? Will you have time to react effectively?

The goal is to protect the life blood of your business …cash flow. Here are some actions to consider.

Being homicidal with respect to cash flow entails a number of things. First, the working assumption during recession is that sales, on average, will go down…that less money will be spent. So, in order to protect cash flow, you would protect inflows by offering sales and discounts on a regular basis and typically ahead of seasonal offers so that you get the cash first. Yes, you will make less margin, but you’re keeping cash coming in to pay the bills.

Second, on the outflow side, you should consider reducing inventories. The focus is on making sales early, not trying to maximize on sales late in a sales cycle or seasonal period.

Third, reduce fixed costs through layoffs and delay of major purchases. If you have to cut back on marketing, do so on the branding side, not on the direct response side that’s going to bring in sales. There is going to be strong competition for less spending dollars, so make sure you offers are well communicated to get your share.

Fourth, start to extend your terms of payment as much as possible. From a cash flow management process, always allocate resources to cover labor and fixed costs and manage any cash flow gaps with suppliers as much as possible. Cash flow management can be very stressful with many sides looking for money, but you must always plan out how to make payroll or you’re out of business. Many times, when cash comes in from accounts, its quickly paid out to bring things up to date with suppliers without enough being held back to assure payroll gets made in the coming weeks. As recessionary impacts ripple through supply chains, its typically the businesses that understand their cash flow leverage points and plan out contingencies that get through the period with less cash flow problems.

Fifth, bring your financing profile up to date, and develop a solid understanding of how you can obtain money if there is a shortfall. Business financing can take some time to secure and will be harder to locate during a recession so being prepared can be half the battle. Refinancing term loans and mortgages before problems exist can provide cash flow relief on a money basis that will cost you some additional interest over time, but basically serves as insurance against potential future cash flow problems.

Sixth, proactively determine what, if any, personal funds you are prepared to lend to the business. Use personal funds only as short term bridge loans that can come in and out in predictable fashion. If the business goes south, you want to have your personal resources available to you for future living expenses.

These are some basic steps you can take with your cash flow during times of recession. This is not an exhaustive list by any means, but more so a list to get you thinking about how to make sure your business gets to see better days after the recessionary period ends.

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