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Guest Column

Managing cash flow is common sense but often neglected

By KENNETH PARROTT
Published December 25, 2006

Ever been in the situation in which sales are great but your cash situation isn't? A cash flow crunch can arise from various causes. Understanding how to improve cash flow is important in a small business. There are several basic cash flow improvement techniques that tend to be common sense for small business but frequently are neglected.

First, bill promptly. It is easy to get caught up in building up your business and meeting deadlines that you don't bill on a regular basis. This occurs in a small business more frequently that you would expect. Remember, there is always a lag time between billing and collecting those receivables. The sooner you bill, the sooner you get paid.

Improve and manage your receivables. Receivables are basically money that you have lent to your customers. You give them goods or services in advance of getting paid. There are costs involved in creating the goods and services, so as your receivables go up, your cash goes down.

One way to jump-start cash flow is to ask for a deposit up front, thereby reducing the receivable initially and receiving partial payment in advance. This should not alienate your good customers once it is established, if done fairly and properly.

Create incentives for faster payments. Offer a discount for payments within 10 days to reduce the amount of time you wait to get paid. Manage your receivables. Create an accounts receivable aging schedule of what is owed you and by whom. Follow up on overdue accounts with notices and phone calls. Focus first on the larger amounts owed you.

Offering a discount may bring in quick cash on those overdue accounts, but don't offer this until you've tried to collect the full amount.

Avoid slow-paying or nonpaying customers from the start. Require and check out credit references on new customers. Find out where they've done business before and call to inquire about their payment history. A little extra effort spent in the beginning is much easier than chasing down a deadbeat account later.

Require cash on delivery for the slow-paying customers rather than turning away business.

Consider accepting credit card payments. Establish a merchant account with a bank to process the credit cards. The bank will charge you a small percentage of each transaction, but the cash is available to you quickly.

Accepting credit cards can also increase your business, as customers find them advantageous and familiar to use. Encourage customers to use this option of paying. It speeds up your cash flow, and the cost is minimal.

Manage your inventory. Don't keep obsolete or slow-moving inventory. Inventory is money that is tied up, not earning interest and not available for you to use. It can even cost you money if you are forced to borrow for other cash flow needs.

Understand and compute your inventory turns. An inventory turn is the number of times per year that your inventory is sold and replaced. The more often inventory turns over, the more quickly it is turned into cash.

Consider using barter instead of cash. Bartering for services or goods you need, with someone who needs your goods or services, reduces immediate cash flow strains because no cash changes hands. Realize this is still a taxable transaction, and the value of the transaction still has to be recorded for tax purposes.

Manage your payables. Take advantage of creditors' terms. If they offer 30-day credit, use the entire time period to stretch your cash flows. Schedule online fund transfers at the due date to stay current, yet keep use of your funds as long as possible. Choose suppliers with flexible payment terms to improve your cash flows. Consider creditors' early-payment discounts.

Weight the value of discounts earned by paying early with your need for cash flows.

Should you foresee cash flow problems sometime in the future, arrange for a line of credit at a bank. Because it is easier to get financing before you need it rather than later when you are desperate, prearrange months in advance of cash flow needs.

Your suppliers may be another resource. They likely understand your business, and if you've been a good customer, they might offer extended terms, as they have an interest in keeping you going.

Your accounts receivable is an asset. There are financial service businesses that will pay you for your receivables. This is called factoring your receivables. Typically, factoring discounts your receivables by 15 percent, but this turns them into cash for current operations.

The best cash flow solution is to be aware of cash outflows and sources of cash.

Don't delay in getting your billing out. Accelerate receiving your money by managing your receivables. Inventory is money sitting on the shelves. The faster it turns, the faster it changes back into cash. Old-fashioned bartering can be used to reduce cash flow strains. Use your payables and suppliers' terms to manage cash outflows to your best advantage.

To avoid cash flow crunches, plan in advance by establishing good supplier relationships and establishing a line of credit. In a crunch, account receivables can be factored to generate cash flows. Cash flow is the life line of any small business. Understand and manage the sources and uses.

For help managing your cash flows, call SCORE at 621-0775. Its knowledgeable counselors are available to offer free advice. They will help you develop a strategy that is effective and helpful to your business objectives.

SCORE is a nonprofit volunteer organization and is always looking for qualified members. I invite those interested to call and attend one of our meetings.

I'm Kenneth Parrott wishing you a great month in business.

Editor's note: This column is one of a series of monthly columns by Kenneth Parrott that provide information supplied by Citrus County SCORE Chapter 646. SCORE, Counselors to America's Small Business, offers free, confidential counseling services to new and existing businesses in the county. For assistance or workshop information, call 621-0775 or visit its Web site, www.scorecitrus.org.

[Last modified December 25, 2006, 06:22:53]