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Cash Flow Management Best Practices

Regardless of the type of business or business size, cash flow is going to be the life blood of the business.  So it stands to reason that cash flow management practices are going to also be important with respect to optimizing present and future business profits.

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.

Click Here To Speak Directly To Business Finance Specialist Brent Finlay

Cash Flow Management Now Requires Greater Diligence

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

Cash Flow Management Trade Offs

As we continue through the current recessionary impacts still being experienced in 2010, there are going to be periods of time where a cash flow crunch will impact many businesses regardless of size.

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.