Managing Business Cash Flow

Every business owner has heard the saying that “Cash is King”. This statement will always hold true because no company can survive without cash, as it is needed to meet the operating expenses (i.e. payroll, rent, insurance, utilities) and investments (Inventory, Buildings, Equipment) of every business.

Cash flow is the measure of inflows and outflows of cash in a business. Cash flow should be managed in order to prepare for and/or prevent cash flow shortages, in addition to identifying and taking advantage of opportunities.

Business owners sometimes place more value on profitability as opposed to cash flow, which normally leads to many problems, because a company can post profits and still go out of business because of a lack of liquidity to meet their financial obligations.

In order to avoid the above problem and countless others it is important that business owners become proactive in measuring, analyzing, controlling, and projecting their cash flows levels. Below are a few pointers to assist you in managing your cash flow.

Collect Your Account Receivables Faster

: The goal in managing account receivables is to convert them into cash as quickly as possible. The faster you turn your receivables into cash the better, because it gives you the necessary liquidity to meet your financial obligations. Businesses can improve their account receivable collection rate by:

* Billing customers as soon as a sale is made rather then waiting several weeks.

* Checking the financial condition of a new customer prior to extending credit to them. Dunns and Bradstreet (D&B) offers credit information on businesses of all sizes.

* Measuring receivables on a current, 30-, 60, 90 day aging, and analyzing it regularly to uncover internal or external problems and to identity late payers and quantities.

* Creating a tight credit policy and enforcing it amongst your customers. On your invoices specify when payments are due and the penalties if payments are not received on a timely basis.

Stretch Your Expenses: The goal here is to hold on to your cash as long as possible, primarily by paying your bills as slowly as possible. If you are allowed 30 days to pay your company’s electric bill, pay it on the 30^th day as opposed to the 20^th day. During that 10 day interim, that cash can be collecting interest in an investment account or can be used for a more pressing issue that may arise within that 10 day interim.

Obtain A Line Of Credit: Obtaining a line of credit can help to meet your working capital needs and take care of emergencies that may arise in your business.

Conservatively Invest Excess Cash: If you have extra cash on your balance sheet, it should not be sitting there ideally without collecting any interest. Any excess cash should be in some form of an interest bearing account. Check with your local bank to see what cash management products they offer, such as an overnight sweep account, where a company’s excess cash is disbursed from their operating accounts at the end of each work day and invested in securities (i.e. Treasuries) over night and then retuned to their account the next day.

Purchase What You Need: Purchasing inventory beyond what is needed, is a common habit amongst many businesses, because many want to take advantage of discounts that are offered and also have the assurance that their shevles are adequately supplied, however, purchasing inventory that will only sit on your shelves longer then the average inventory turn rate will only increase your carrying cost of that inventory. It is very important to keep tight controls on inventory and purchase only what you need.

The above cash flow strategies should get you started in creating an efficient cash flow management system for your business. If you are seeking additional assistance in creating a cash flow management strategy please contact one of Optimum Capital Management business advisors.

Written By: Lloyd Cambridge, CFO of Optimum Capital Management, LLC