Posts Tagged ‘cashflow’
Cash Flow Management Now Requires Greater Diligence
March 17th, 2010
As I’ve previously written that while the out look reports for the current recession are improving, the after effects are only starting to surface in many cases.
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
Business FinancingManaging The Cash Flow Gap | Working Capital Bridge Financing
December 14th, 2009
Cash Flow Gap Management Can Be The Key To Growth And Stability
For this discussion, I define cash flow gap as the difference between the timing of cash inflows and outflows. For instance, if your supplier terms are 30 days and your customer terms are 60 days, you will have a cash flow gap to fill with some form of working capital financing.
Even if the terms are equal, there could still be gaps or delays between the time an expense incurred needs to be paid and when the revenues related to the incurred expense get collected.
Some operations are fortunate in that they don’t have a cash flow gap at all. However, in most business cases, there is a need to finance gaps between inflows and outflows on a regular or semi regular basis.
The working capital financing can come in the form of cash from the business itself, an operating loan that is connected to the business bank account and goes up and down as required, shareholder loans, term loans, factoring of accounts receivable, inventory financing, and so on.
For profitable operations, the financing of a cash flow gap is temporary in nature and is effectively bridge financing where the beginning and the end of a cash flow gap is clearly defined.
For operations that are currently unprofitable, the cash flow gap actually creates a longer term liability as the loss position must be covered off from financing for as long as its required for the business to get back into a profitable position and repay the debt.
The keys to managing the cash flow gap are as follows:
- Work to match up the days outstanding for trade payables with the days outstanding for accounts receivable. Gaining a few days through closer management will reduce the cash flow gap.
- If you work on projects, try to match the project costs with the related expenses when negotiating terms and making payments. If a supplier is aware of the project they are supplying for, make sure they understand that they will get paid when you get paid. Suppliers are more likely to work with you on payment delays if they know you are matching the revenues you receive to the project. In order to make this an effective strategy, make sure you are only working with credit worthy customers that the supplier will be comfortable with.
- Assess the benefit of payment discounts versus available working capital. Taking advantage of an early payment discount from a supplier will actually increase your cash flow gap, but this may be worth doing if you have the working capital available and the cost of the working capital is less than the discount you will receive for paying early.
- Forecast out your cash flow for at least 6 months. If you’re in a growth mode or in a seasonal business where sales spike, make sure you understand when cash flow gaps will occur, how much capital they will require, and how long they will last. If you’re going to require more capital than you now have available, you’re going to need some time to secure capital prior to the period of need.
- Focus on higher margin products and services to offer. If the cash flow gap is increasing, it may be negatively being impacted by growth in lower margin products and services, or a change in your mix that has lowered your overall margins. Again, good forecasting and periodic sales review should help identify the size, timing, and duration of cash flow gaps as well as their causes allowing you to take proactive measures to avoid the business being negatively impacted.
Cash Flow Choices To Carefully Consider
December 13th, 2009
When Managing Cash Flow Shortfalls And Gaps, Consider These Watch Outs
When a small business cash flow gets tight, there are going to be tough choices to make regarding who gets paid and who’s payments are going to get delayed.
If you have employees, then its going to be important to allocate available funds to payroll to keep them coming to work. If you require services and materials from suppliers, then timely payments are likely required to keep the lights on and production running.
So where do you cut back on outflows? Who do you decide not to pay? One of the most common choices made for delaying payments is government remittances.
Payroll deductions, income taxes, sales taxes, etc.
For many small business managers and owners, this seems like a logical choice…i.e. the government has lots of money, no one is in your face right away for payment, the money due is not critical to your ability to operate, and so on.
And in many cases, arrears with government related accounts can build for months before you start getting more serious sounding requests for payment.
While the government may be somewhat slow in reacting to your missed payments, their ability and powers to collect what you owe (depends on country and jurisdiction) can be far reaching.
How far reaching?
They can freeze the business bank account.
They can seize the cash in your account.
They can contact customers that owe you money and direct them to make payment to them.
And, if you owe funds for payroll source deductions, they can come after you personally regardless if the company in incorporated if you are a director of the company. Director liability can include payroll related expenses.
To be clear, I’m not a lawyer and all of the above may or many not apply to the jurisdiction that your business falls under.
But, regardless of where you reside, government collection activities can be scary. An once they have a bead on you, your cash flow planning will need to take on new priorities.
If you are in this situation, or close to it, you may be able to negotiate repayment terms for the arrears over a period of future months provided that you can clearly display a workable plan.
The overall point here is to be careful with delays in paying government remittances of any type, but especially payroll deductions. If you get to the point where you’re bank account gets frozen, it could be difficult to impossible to resolve the government back taxes and still continue to operate
Business FinancingCash Flow Survival Tips During Recessionary Periods
November 25th, 2009
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.
Business FinancingYour Recessionary Cash Flow Protection Plan
October 14th, 2009
Here’s Some Tips To Protect Your Cash Flow During A Recession
As 2009 starts to draw to a close, the recession has not yet loosened its grip on small and medium sized businesses. And regardless of what the newspapers say, the recession is still very real and dangerous to your cash flow and will likely be for quite a while.
With that in mind, here are a few things to keep in mind when managing cash flow during a recessionary period.
1. Remember that you’re on your own. Whether your cash flow is in trouble or not, assume that you will get no help from your banker if the need arises. I’m not saying they can’t help you, but don’t assume that they will and make sure you’re prepared for them to potentially say no.
2. All the credit you have accumulated up to now that has proven to be more than enough for your business needs is not enough. I’m not going to say, go crazy and apply for credit all over the place. I’m more referring to 1) applying for credit with suppliers you don’t already deal with and 2) asking your existing suppliers for higher limits with the potential promise that you will do more business with them. In a recession, credit will dry up fast in the most unexpected places, so make sure you have good sources of credit to draw from.
3. You are your own bridge. Sometimes cash flow crunches in recessionary periods end up being short term gaps that result from delayed payments to you from customers, or a credit squeeze by a certain supplier that impacts you short term until you can source else where. In any event, if these clear short term cash flow gaps appear on the horizon, you personally are likely the best source of bridge financing. Why? Because the time period for the bridge is short (less than 6 months I’d say), so its not worth the time and energy to hunt down business financing at a time when its going to be difficult to secure anyway. Second, the less any one else has to know about your cash flow, the better. Having to go to your bank to explain a short term cash flow gap that you need their help with may just be opening up a can of worms. They may decide to help you, or they may decide to take a closer look at your business and perhaps decide that they’re already giving you too much credit and want some back, or who knows what else. Banks can be “fickle partners” in a recessionary time and its usually best to just keep everything low key with them until the economy gets back to normal.
But in order to be your own bridge, you need to have the cash available to inject into your company. So, either proactively get a personal line of credit against your house, or wait until you see a glimpse of cash flow trouble and then apply. If you already have some personal sources in place, great. Just make sure that the credit is available to you in the event that you need to use it for a bridge.
Personal real estate financing is the simplest, cheapest, fastest form of financing available to you, which by the way will still take at least 2 weeks to fund AFTER you have an approval, so fast is a relative word.
If you have good credit, even in a recessionary period, you should be able to get a prime to prime plus one line of credit up to 75% of the value of your home. And remember, the plan is to never use it, but if you need it, you have it to draw from.
A final point to mention here is make sure this is a short term bridge situation before throwing your own money in. If there’s no clear end to the other side or no bottom to the hole in the cash flow, I would strongly recommend keeping your personal funds out of it.
Remember that a bridge has clear well defined sides to it otherwise its not a bridging situation and needs to be looked at differently.
4. All Cash Is King. If you don’t already, offer your customers cash discounts for early payments if you extend credit to your customers. In a retail setting, offer discounts and sales more often to generate more cash flow and potentially give you an opportunity to reduce inventories. Yes, this will cut into your margins, but consciously taking actions to generate more cash flow may become critical down the road.
5. Match up Inflows with outflows. If you operate a business, like construction, where revenues and expenses are matched to individual projects, try to match your vendor payments related to a project to the inflows you receive. This may delay vendor payments which they won’t like, but if they know their materials were consumed by a particular project and you haven’t got paid yet, then they are typically more inclined to work with you, as long as you regularly communicate to them and as long as progress keeps being made on their account.
By taking this approach you will not be eating up available cash to pay vendors before you get paid (If you can do this at least some of the time, it can be a big help to your cash flow). If a delay takes longer than you had forecasted, then you may now have problems making the weekly or bi-weekly payroll.
Just remember that cash flow problems are out there waiting to happen. You can’t predict when they may impact you, but you can be prepared to deal with them if and when they occur.
Cash flow contingency planning can make the difference as to whether you come through a recessionary period unscathed or not.
Business FinancingThe Recessionary Cash Flow Domino Effect | Business Financing Nightmare
October 8th, 2009
Cash Flow Problems In Recessions Are Typically Caused By a Domino Effect
The recession creates the obvious problem of less sales for your business, but even if you’re in a mostly recession proof business, or one experiencing only a modest down turn, beware of what I call the cash flow domino effect.
This is most relevant to businesses that are part of large supply chains, but it can happen to virtually any business, depending on the circumstances, and all these triggers can be like falling dominoes heading straight for your cash flow.
Trigger # 1. Someone in your supply chain or even a related supply chain gets into cash flow trouble. They can’t pay their bills, which impacts the cash flow of their suppliers. Now the suppliers customers will have their cash flow impacted and so on and so on down the line until the problem lands on your doorstep. The more cash flow problems originating in the supply chain, the greater the domino effect and the more likely of anyone being impacted.
Depending on where you sit in the chain relative to where the first domino falls will likely determine how this impacts you. In some industry this can be a complete company killer as business try to find ways to cover their operating costs and protect their credit until such time as the money starts flowing again.
Trigger #2. Your business is doing ok despite the recession and everything seems to be in hand when all of a sudden your bank calls your loans or puts you into what they call special loans. You’ve been a good customer for years and may have never missed a payment, but here they are with a knife to your throat.
Why would the bank do this?
Could be lots of reasons. They may feel that they are over exposed in your industry right now and want to strengthen their portfolio by calling in some loans they know they can get their money out of without losing money. You many be “offside” on one of your debt covenants which might be only marginal, but its an excuse to again reduce their exposure. Or based on the current conditions, they have significantly revalued your security and now believe to be under secured based on the amount you owe them.
Even if they don’t call your loans, they can trim back your limits and still wreck havoc with your cash flow. Remember that most operating credit is on demand and can be called or reduce on demand at any time for any reason.
Its just business, nothing personal.
But you still are in pretty good shape, so you’ll just do to another bank and get business financing some where else, right?
Trigger #3. In the middle of the recession, hardly any main stream lenders are lending any money and few are doing more than selectively helping out their existing clients. So even though you have a viable business, you can’t get a low cost loan. If you have assets to leverage, this could force you into more expensive asset based solutions until the recession blows over and hopefully you have the margins to cover the cost or you could become Trigger #1.
As you can see, the cycle can feed on itself and increase the potential negative impact on your cash flow.
As we get into the last quarter of 2009, the dominos have been starting to fall and are building momentum in some industries and geographies. How do I know? All I hear these days when I answer the phone is a business owner explaining which trigger he’s just been hit by.
More on what to do to protect your business cash flow in future posts.
Business FinancingIncome and Cash Flow Forecasting Is Both Art And Science
October 5th, 2009
Forecasting Business Cash Flow And Income Has A Lot To Do With Both Your Experience and Intuition
Yes, cash flow and income forecasting can be a pretty mechanical process as all the numbers have to be entered and tabulated and assessed. But when you’re looking into the future, the numbers also have to be projected, guessed at, and pulled out of the air to some extent.
That’s where both your experience and intuition comes into play and it will amaze you how both improve your accuracy over time.
When I was managing an annual cash flow that was well in excess of half a billion dollars annually, I got pretty good at estimating where the ship was going to dock and how we were going to hit “the number” decreed from the ivory tower by people so removed from what was going on they may have been on another planet, or at least it seemed like that some times.
I had a large staff, reports, and systems out the wazoo, so you would think this was all highly mechanical, which in many ways it was.
But when it came down to determining which actions to take in the next 30 -60-90 days to make the overall cash flow and income projections work, it always came down to my estimates and guesses of how certain items, both inflows and outflows would play out. Basically my estimates or key assumptions of how things would play out in real time.
And in the real world, you will always have to guess because there’s always unknowns, curveballs, and goof ups to deal with.
So why go to the trouble of creating cash flow and income forecasts if you’re just dreaming it up anyway?
You do it because through the course of continually going through the exercise of reviewing everything that matters to your targeted outcome and summarizing each component down to time and dollars, you develop the ability to accurately estimate how everything will unfold.
Intuition is nothing more than your minds ability to draw on lots of self absorbed data and apply it to a repetitive ritual that generates a realistic result of what is yet to occur.
The more you feed your brain with the key measurements of the business and the more you go through the assessment cycle, the more accurate your guess work will become.
And in many ways, this is the secret of some of the world’s most successful people who always seem to make the right decision most of the time or when it matters most. They have spent, in many cases decades, feeding their own super computer all sorts of relevant data about their business, competitors, the market, the economy, and anything else that could have an impact on what they do.
When you’re field of vision is wider than your competitors, when you can instantly see and assimilate relevant information into the right decision most of the time, then you have developed superior intuition. And by acknowledging this to yourself and utilizing it to your benefit, you are practicing both art and science to achieve a greater outcome.
Back in the corporate world, there were only four days in the year that meant anything… the end of each fiscal quarter. And everything that took place between those dates was to achieve the quarterly target that lay just ahead.
People used to ask me what it was like to come up with the plan to get to the number and then manage to it. Because everything was such a moving target, moving at real world speed, I would say it was like trying to throw a brick through the open window of a speeding car and having it go right through the car without hitting the driver as it went out the other side.
But every quarter, I hit the number. I can’t say it got a whole lot easier, but as time when on, I made better plans to get to the results, as more and more things came into my field of view.
As a business owner or manager, you may view forecasting as a waste of time or a use of time you don’t have. But you need to find the time to work it into the mix for by so doing, you will greatly expand your intuition and become much more accurate in your decision making without even realizing why.
You don’t necessarily have to do it all yourself, but being involved in the process can create a powerful benefit to you that will leave your competition scratching their heads when you always seem to be one step ahead of them.
Business FinancingKey Elements Of Cash Flow Management
October 3rd, 2009
Here Are The Most Important Elements Of Business Cash Flow Management
Let me outline the exact areas you need to focus on when performing cash flow management in your business.
But before we do that, just remember that cash flow management is one of the three primary business finance pillars all businesses focus on to some degree to be successful. The first pillar is securing capital, the second is cash flow management, and the third is cashing out on exit.
Back to cash flow.
I’m sure you’ve heard it a million times that cash flow is the key to any business. Nothing new there. But, what goes into managing a businesses cash flow and how do you make sure you’re focusing in on what’s important?
First, lets define this further. I define cash flow management as anything that has to do with money in your business including who its owed to, who its owed from, money spent on assets, money given to charities, paid in taxes, and on and on.
Cash flow management must have an all encompassing discipline to it or its likely going to be a waste of time. This is the first key element that you need to consider.
Too often, business owners track certain inflows and outflows and ignore others viewing them as not material or insignificant, or perhaps not wanting to admit that they are significant. When things are going well, a certain amount of overlooked items doesn’t really matter, but when things are not going well in the business, even a small amount of unaccounted for expenditures can become painful when it comes time to pay the rest of the bills.
The second key element is developing a cash flow management tool, even if its on a spreadsheet, to keep track of all inflows and outflows. This is effectively a dashboard into the business, equating everything into time and dollars so that you can proactively manage the business operations. Even when people go through the effort of building out a cashflow template, many still make these two very serious mistakes.
First, they allow too much time between reporting intervals. If you have a spreadsheet with inflows and outflows, you will typically have columns for the period of time. If you’re cash flow is tight, the reporting period needs to be shorter, like a week. There can be too much variability over the course of a month for this interval to be accurate to you in tight cash flow situations.
Second, they don’t forecast far enough ahead. At a minimum, especially if you are working with longer sales cycles or in a period of growth or decline, you should be forecasting at least 3 months ahead or even longer. This helps to see trouble on the horizon and gives you time to proactively deal with a projected issue while staying out of panic mode.
The third key element is to assign one owner of the cash flow management process and make it a requirement that the cash flow gets updated at least once a week. By having one person at the controls, the information will be more accurate and you also have someone, even if its yourself, to hold 100% accountable. Problems usually start when there are too many cooks sporadically updating information and making assumptions as to what someone else has done.
The fourth key element of cash flow management is to be ultra conservative in your projections of the future months. Expect income to come in slower and more expenses to appear than planned. This creates an internal buffer for when things go wrong, which they always do.
The fifth key element is to assign time and money to everything that happens in your business so you always have a solid picture of where you’re at today and what the near future looks like. Cash flow management is also part measurement in that any project you have or take on, should have precise cost and revenue projections and time lines, which all gets filtered into the master cash flow and your decision making process. Before a project can be approved, are there funds available in the time required? What is the expected payback period? When the results of a project or contract come back, did they meet or exceed the expectation, and if they did not, how are we going to deal with the cash short fall?
If comes back to the old adage, if you can’t measure it, don’t do it and everything needs to be funneled back into your cash flow management system to effectively be measured.
Business Financing