Driving Your Company's Value

Cash Flow Management Checklist – Part 1 of 7

There are many ways to work on improving your cash flows.  They can be organized into groups related to the various aspects of your business.  This series of posts will list actions you can take related to seven areas of your business.  They are:

1. Sales
2. Operations
3. Credit Management
4. Purchasing
5. Inventory
6. Capital Investments
7. Capital Structure (debt and equity)

Sales related cash flow improvement actions include:

• Increase sales – increased cash sales will provide the most immediate boost to cash flow.
• Increase prices – consider increases to only slow payers to offset your financing and collection costs with their slow pay.
• Bring the sales force into discussions related to customer pay performance – consider sales incentives related to a customers’ pay performance.
• Improve your credit granting procedures when accepting new customers
• Modify your sales agreements to require deposits (retainers) or multiple payments over the sales/collection cycle.
• Reduce the credit payment period granted to customers. – use care as being too restrictive can also reduce overall sales.

10 Ways to Enhance Cash Flow

One of the things that separates well managed companies from others is the management of cash flow. And in these more turbulent times, managing cash flow is more important than ever. Here are 10 ways to enhance your company's cash flow:

1. Assess customer credit risks up front. If you sell on terms, you are extending credit to your customers and have the risk of not getting paid for services provided or products sold. Make sure you clearly establish and communicate your billing procedures and payment schedules. Also consider credit checks on new customers before offering credit carte blanche.
2. Bill immediately. You can't get paid for what hasn't been billed yet. My experience is that there is almost always room for improvement in billing procedures...you can't bill soon enough. I worked with one client whose policy was to have billing done by the end of the month for the previous month. Instead of billing at the beginning of the month and having cash in the bank, the client had a line of credit outstanding all year to finance unpaid receivables.
3. Bill thoroughly. Make sure your bills are clear and your customers can understand them. Unclear billing is an excuse for a customer not to pay immediately. Related, be sure to stick to your billing policies. One professional services client I worked with had more than a year's worth unbilled work on the books...they worked for free for a year!
4. Collect your bills. One of the greatest potentials for loss of cash flow flows from uncollectible accounts receivable and the older the A/R gets, the less likely it is to get paid. Establish a collection policy and stick to it.
5. Make paying your invoices easier. If you don't already, consider accepting credit cards, offering pre-authorized debits, billing electronically, and/or providing postage paid return envelopes with your bills.
6. Time your own payments carefully. Review payment terms on your payables and use them to your advantage.
7. Cut unnecessary expenses. Good times covers a multitude of sins that are exposed in bad times. Is your insurance coverage current? Do you have any policies or controls on employee expenditures? Who manages inventory purchasing? Etc.
8. Consider extending payroll periods. If you are paying weekly, bi-weekly or monthly payroll periods may defer payroll tax deposits and add to cash flow.
9. Make sure your receipts are deposited as quickly as possible. Cash in the register or checks in the drawer do nothing for your cashflow.
10. Plan ahead. Take advantage of volume purchasing, purchase discounts, and other cash management and budgeting techniques that will give you a leg up in managing cash flow.

Managing Capital Expenditures in Slower Economy

There are five important considerations / ways to manage your capital expenditures in a slower economy

1. Align your capital and business strategies closely and do not be destracted by a short term focus.

2. Track ROI on every capital expenditure regularly.

3. Use outsourcing wherever possible to keep capital expenditure lean

4. When buying software, time the purchase to occur just before the end of a quarter, as vendors will be more likely to offer discounts in an effort to make their numbers better.

5. Summarize and keep track of capital expenses reviewing regularly to verify the expense is still justified and that the reasons and assumptions are still valid.

Increasing Your Cash Flows

Guest Post: Terry Allen CPA/ABV, ASA,  The Financial Valuation Group, Des Mones, Iowa, (www.fvginternational.com)

There are only three ways to increase your company’s cash flow. Can you name them?

1. Increase your profitability - if you improve your profit per unit sold by cutting costs or raising prices and/or you lower your marketing and administrative costs, you will improve your bottom line profits and cash flow.
2. Increase your sales volume - if you increase the unit sales of your current products, you will increase your profits and cash flow.
3. Add more products - if you expand your product line with new or enhanced items, you will also increase your sales and cash flow.

Of course, you have to accomplish these things without increasing other costs to the extent that they offset the increased profits and cash flow.

What are you going to do to increase your cash flows?

Good Cash Flow Management Is Simple

Cash management is an essential part of being competitive today.  Luckily, good cash management is simple.   You just need to:

1. Understand why, when and where your cash needs will occur.
2. Control your financial drivers (accounts receivables, inventory, etc.) which have the most significant impact on your cash balances.
3. Establish and maintain good relationships with lenders and your creditors.
4. Develop a cash flow planning system as part of your budgeting process to quantify your cash flow needs.

The starting point for good cash flow management is developing and updating projected financial statements, including cash flow statements, which will provide you with the answers to why, when and where your cash needs will occur.  The projections will also provide the basis for communicating with your bankers and creditors. Watch for future postings on developing and managing with your projections.

Alternative Sources of Capital (Money)

inancing a business and especially a high growth business  is always one of the more difficult issues facing any business  owner/manager.  In addition, the degree of difficulty increases the smaller or newer the business.

Most business owners use credit cards, home loans and friends and family to fund their business. We have compiled a list of alternative sources of funding potentially available to businesses.  To find out more about any of the sources, start with a Google search.  Our list includes:

Investors

• Angel Investors
• Silent Partner
• Private Placement Offering
• Initial Public Stock Offering 
• Venture Capital Funds
• Private Capital Groups

Operations

• Fund From Cash Operations
• Licensing Your Technology
• Sell Lease Back of  Assets
• Pre Development Purchases From Customers (known as Launch Customers)
• Vendors Willing To Give Favorable Financing
• Form A Strategic Alliance
• Form a Joint Venture
• Employee Sweat Equity
• Silent Financial Partner

Government Sources

• SBA (Small Business Administration) Loans
• SBIR (Small Business Innovation Research) programs
• STTR (Small business Technology Transfer) programs
• State  and/or City Development Agency Funding

Bank/ Institutional Financing

• Business Lines of Credit
• Factoring
• Accounts Receivable Financing
• Equipment Loans
• Long Term Debt Financing

Personal Sources

• Friends
• Family
• Home Equity Loans
• Credit Cards

If you know of  additional sources or  government grants please provide them by adding a comment to this posting.

Common Errors in Building Projections

In my work I often review financial projections prepared by management. Sometimes these projections have significant detail and evidence a lot of thought and analysis. Other times they are merely the results of casual “if everything breaks our way” thinking. Regardless of the effort, I have noticed some common oversights or mistakes made in their development. If you are building projections, make sure you consider the following:

1. Unless something dramatic in your business model or operations is changing, past performance is often indicative of the future. For example, if your company has had stable revenue growth and/or stable margins, make sure you provide a strong argument for changes in either. When I review projections and attach them to historical performance, Revenue trends often have that “hockey stick” look…trending up slowly in the past (on a trend line basis) and then, starting in the first year of the projections, growth just soars to new heights. Just as critical, is a dramatic change in gross or operating margins without some change in the business model that causes such.
2. Make sure you project out balance sheets as well as income statements, and reconcile them with a statement of cash flows. If you are projecting growth due to new product lines or significant expansion in production capacity, how much investment in capital assets must be made to meet production targets and how will that be paid for? After all, while profits are nice, if you don’t have sufficient cash, you can’t implement your plan.
3. Most balance sheet projections forecast out all the non-cash assets and liabilities, and reconcile (or solve to) cash. If your projections show a large accumulation in cash as the projections go out, make sure you:
   a. Have enough investment in fixed assets to support the growth. I’ve seen a number of times projections of sales on a per unit basis that exceeds production capacity by more than 200 percent, with no investment in plant expansion. How can that be?
   b. Have forecasted sufficient growth in working capital to support the growth. For example, if your current A/R turnover ratio is 12 times now, if your projected A/R turnover rate is 18 times, you may have underestimated your working capital needs.
   c. Have not overestimated your future profit margins
   d. Correctly amortized debt over time
4. Account for tax liabilities. Even if your company is a pass through tax entity (such as an S-Corp), you’ll need to forecast a distribution to shareholders sufficient enough for them to pay their tax liability on future projected profits.
5. Compare your past forecasts with reality. If you have consistently fallen short of your projections, consider ratcheting them down to reflect likely reality.

Good, reliable projections become more than just something your banker wants. They can become key to your getting your business to the level you want. Remember the old adage, “Those that fail to plan, plan to fail.”

Good Cash Flow Management Is Simple

Cash management is an essential part of being competitive today.  Luckily, good cash management is simple.   You just need to:

1. Understand why, when and where your cash needs will occur.
   
2. Control your financial drivers (accounts receivables, inventory, etc.) which have the most significant impact on your cash balances.
   
3. Establish and maintain good relationships with lenders and your creditors.
   
4. Develop a cash flow planning system as part of your budgeting process to quantify your cash flow needs.

The starting point for good cash flow management is developing and updating projected financial statements, including cash flow statements, which will provide you with the answers to why, when and where your cash needs will occur.  The projections will also provide the basis for communicating with your bankers and creditors. Watch for future postings on developing and managing with your projections.