Posts Tagged ‘managing cash flow’
Getting The Most Out Of Available Cash
September 6th, 2011
“Is Your Business Using Cash As A Hammer Or A Nail?”
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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Business FinancingGetting The Most Out Of Your Cash Flow Management
January 21st, 2011
“When It Comes To Cash Flow Management, Are You Leaving Money On The Table”
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
Business FinancingCash Flow Management Trade Offs
February 6th, 2010
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.
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