Hotshot Connect Forum :: The 10 Absolutely Must-Follow Cash Flow Rules

admin · Site Admin

Philip Campbell's Bio

The 10 Absolutely Must-Follow Cash Flow Rules
When it comes to properly managing the cash flow of your business, the best way to move from where you are now to where you want to be is to get a clear picture in your mind of the benefits you will enjoy as you take control of your cash flow.

The benefits include:

Increasing the likelihood that your business never runs out of cash.
Eliminating the constant worry associated with not knowing what your cash balance is right now or what you expect it to be in the near future.
Improved relationships with your vendors because they are no longer banging on your door demanding that their past dues invoices be paid immediately.
The ability to see cash flow problems long before they can happen.
In short, you free yourself to focus your unique talents and abilities on growing your business rather than fighting the constant cash flow fires.

Here are 10 cash flow rules you can implement immediately that will transform the way you manage your business from this point forward. These rules are the keys to creating the kind of financially successful business you deserve.

1. Never Run Out of Cash.
Running out of cash is the definition of failure in business. Make the commitment to do what it takes so it does not happen to you.

2. Cash Is King
It's important to recognize that cash is what keeps your business alive. Manage it with the care and attention it deserves. It's very unforgiving if you don't.

Remember, Cash Is King, because No Cash = No Business.

3. Know the Cash Balance Right Now.
What is your cash balance right now? It's absolutely critical that you know exactly what your cash balance is.

Even the most intelligent and experienced person will fail if they are making business decisions using inaccurate or incomplete cash balances. That's the reason why business failures are not limited to amateurs or people new to the business world.

4. Do Today's Work Today.
The key to keeping an accurate cash balance in your accounting system is to do today's work today. When you do this, you will have the numbers you need - when you need them.

5. Either You Do the Work or Have Someone Else Do It.
Here is a simple rule to follow to make sure you have an accurate cash balance on your books. You do the work or have someone else do it.

Those are the only two choices you have. The work must be done. It's like mowing the lawn. You can't just ignore it. Someone has to do it. That means either you do it or have someone else do it.

6. Don't Manage From the Bank Balance.
The bank balance and the cash balance are two different animals. Rarely will the two ever be the same. Don't make the mistake of confusing them.

It's futile (and frustrating) to attempt to manage your cash flow using the bank balance. It's a prescription for failure. You reconcile your bank balance. You don't manage from it.

7. Know What You Expect the Cash Balance to be Six Months From Now.
What do you expect your cash balance to be six months from now? This one question will transform the way you manage your business.

This question really gets to the heart of whether you are managing your business or whether your business is managing you.

8. Cash Flow Problems Don't "Just Happen."
You would be shocked and amazed at the number of businesses that fail because the owner did not see a cash flow problem in time to do something about it.

The key is to always be able to answer the question - what do I expect my cash balance to be six months from now?

9. You Absolutely, Positively Must Have Cash Flow Projections.
Cash flow projections are the key to making wise and profitable business decisions. They give you the answer to the all-important question from Rule # 7.

It's impossible to run your business properly without them.

10. Eliminate Your Cash Flow Worries So You Are Free to Do What You Do Best - Take Care of Customers and Make More Money.
This is the real key to your success in business. The reason you have to make sure you have the cash flow of your business under control is so you are free to focus all your time and talents where you can make the most difference in your business.

When you have your cash flow under control, you are free from worry, doubt and concern. You have the cash flow information you need to make sure that everything you do each day in your business is clearly focused on making your business better.

You have the information you need to measure your progress using the amount of cash you generate (and keep) for yourself and your business as your ultimate financial measurement. In subsequent columns, I will delve into the specifics to help you achieve each step.

admin · Site Admin

If you increased your sales by 25% to 50% over the next six months, what would happen to your cash balance?

My experience is nine out of 10 business owners can't answer this question. That's why so many businesses succeed in growing their business only to end up with an uncomfortable and embarrassing cash flow crisis on their hands.

How Do You Define "Cash Flow"?
Knowing what makes up your cash flow is the first step to avoiding a cash crisis. Most business owners believe their cash flow is defined as the revenues they generate less the expenses they have to pay.

Not true.

The answer lies in the fact that the accounting rules that govern the creation of financial statements are not about tracking the actual flow of cash through your business. They are focused on measuring profit or loss -- not cash flow.

The "bottom line" of the P&L is net income. And net income does not tell you what happened to your cash balance during the period. It merely defines net income based on the accounting rules used to create the income statement.

It's an important measurement, but it is only one component of understanding and managing your cash flow.

Certain cash flow items never show up in an income statement while other cash flow items will show up there but in different periods and in different amounts. So what you will find is that your income statement will not show you what happened to your cash flow. Why? Because your cash flow is made up of more than just profit and loss. It also is affected by:

Accounts receivable
Inventory
Accounts payable
Capital expenditures
Borrowings and debt service
Other "timing" differences
That's why you can't look at your income statement and see what happened to your cash during the month. Profit and loss is only one component of your cash flow. You have to have a clear picture of how each of the other areas affected your cash flow each month in order to understand, and take control of, your cash flow.

Here's an example to illustrate the point.

I Made Money, But What Happened to the Cash?
I worked with a client recently who could not understand why his income statement said he made money last year but he didn't have enough cash to pay all his bills.

In this case, the difference between his net income and his cash flow was primarily a result of the purchase of a truck for cash, sales made during the period that were not collected (accounts receivable), estimated tax payments made in an amount different than tax expense for the period, increased inventory levels in preparation for the coming selling season, distributions to the owner, and principal payments on a bank loan.

The rules of accounting determine when transactions are recorded in your financials and how they are recorded. The reality of business determines when you receive, or let go of, your cash.

It's All About the Cash
On top of having a P&L that governs your accounting life, it's important to keep a schedule that governs your monthly cash flow. Imagine having a schedule in front of you every month that showed you exactly what was going on with your cash flow. A schedule that made it simple and easy to know exactly what was going on with the lifeblood of your business -- your CASH.

That's the secret to taking control of your cash flow.

You need an easy-to-understand view of each component of your business that affects your cash flow. Your cash flow schedule needs to show you what's going on with each of the components of cash flow mentioned above.

If you're ready to take control of your cash flow, check out my December column, which provides you a template and step-by-step instructions for formatting easy-to-understand cash flow projections.

Focus on understanding and managing your cash flow each month and you will make it dramatically easier to grow your business without creating a cash flow crisis in the process.

admin · Site Admin

Turbulent world economic markets can affect your growing business -- even if you don't sell overseas. Here's how to shelter your company from adverse economic times.

You can't control the crazy, fluctuating world economic markets, but you can (and should) tighten your seat belt

Ask Frederick Roberts when he first began to get anxious about economic matters, and he doesn't even hesitate before replying. "It was when the news began to surface about all those problems in Asia," confides the president and chief operating officer of Certified Diabetic Services (CDS), a mail-order diabetic-supplies company based in Naples, Fla.

No, that isn't because his three-year-old company brings in any of its $9 million in sales from diabetics in the Far East. But when Asian companies started taking a nosedive, Roberts began worrying about a trickle-down effect that could possibly wind up affecting his company's credit picture. He explains, "When those companies were strong, they bought so much U.S. debt. Once it was clear that they were in trouble, I started asking myself what consequences that could have on our interest rates."

To Roberts, a former chief financial officer with years of experience in international finance, ignoring those early warning signs would have been foolhardy. "These days, you can't run a growth company without thinking globally," he emphasizes, adding, "That means continually trying to figure out which new factors or variables will likely affect your financial model--and adjusting your strategies accordingly." (It also requires the flexibility to keep readjusting in these unpredictable times, as Roberts needed to do when U.S. interest rates started falling rather than rising as he had originally expected.)

For some business owners, warning bells might have sounded when the bottom started dropping out of the U.S. stock market. Or maybe it was the collapse of the Russian economy, or Brazil's economic troubles, that created anxieties. Or maybe it was all those headlines about the $3.6-billion bailout of a hedge fund for the superrich (an especially painful reminder that rescue funds for small entrepreneurial companies are, shall we say, few and far between).

Business owners can't control the problems that have cropped up, and that may continue to develop, at various hot spots across the global economy. But they can--and should--take proactive steps now to shelter their companies from unwanted consequences of a worldwide downturn. After all, if a company's underlying financials are strong, it should be able to capitalize on competitors' weaknesses, prosper, and continue to grow, even in adverse economic times.

Protect your cash flow
To Seth Godin, president of Yoyodyne, a $5-million on-line direct-marketing company based in Irvington, N.Y., happiness for a business owner boils down to one simple thing: positive cash flow. At his three-and-a-half-year-old company, he confides, "we think about this every day. But there are a lot of people who forget, when times are as good as they've been during the past few years, that the business world is cyclical and that you need money to make money."

Sound cash-flow management is essential for any growing business. But here's the flip side of that reality: the stronger the economy is--and the faster a company is growing--the easier it can be to overlook cash-flow controls, sometimes without even suffering negative consequences...at least for a while. "The best thing about volatile economic conditions is that they remind managers to refocus their attention on the basics," notes Jeffrey Levine, a certified public accountant based in Newton, Mass., who warns his clients that it could take as long as 12 to 24 months for the full ramifications of today's economic problems to hit their businesses.

Granted, some companies' cash flow will take it on the chin much sooner than others', especially if they sell directly to countries or industries that are already experiencing difficulties. But there's only one way to begin, and the time to do it is now: evaluate your cash-flow controls, and tighten them promptly wherever it seems necessary.

If there is one single point of vulnerability in most companies, it's accounts receivable. That's because entrepreneurial companies almost invariably make the mistake--especially in their early or fast-growth stages--of paying much more attention to making sales than to collecting receivables.

That's never a great idea, but when the economy slows down and more customers start taking longer and longer to pay their bills, the result is a cash crunch. Factor into that the growing number of corporate bankruptcies that have dotted the U.S. business scene since 1997, and all those uncollectable bills could well turn the crunch into a cash-flow crisis for far too many companies.

Levine's advice? "Be very selective about whom you give credit to and also about how much credit you give them. Remember that you don't want just any customer. You want the kind who pays you and pays you promptly." Levine particularly likes the strategy used by a client of his in the wholesale distribution business. "Before even issuing credit, management carefully interviews customers--in person, if possible, and if not, in an extensive telephone conversation. That's in addition, of course, to checking the prospective customer's credit record and references. If the company decides to approve a credit relationship, the limit is set quite low for the first six months and increased in gradual intervals only if the customer's prompt payment history warrants it."

Of course, even the best of new credit policies won't protect you from experiencing problems connected with past sales. But the best line of defense is something that, unfortunately, many companies lack: a good tracking system that will alert them to collection problems and then trigger prompt action to resolve them. (See "Collect Those Receivables!" below.)

Here's a point to keep in mind, especially during economic downturns: collection problems often escalate in ways that your company can avoid by being willing to just say no to the wrong kind of sales. That takes organizational discipline. Don't send new shipments of goods or perform any new services in cases in which receivables are more than 45 days overdue. (That's not to say that receivables shouldn't be collected within 30 days, but you don't want to risk losing a customer when his or her check really might be in the mail.) Make certain that your sales team knows which customers are late payers, and insist that no new sales be concluded before old receivables are collected.

In some cases it pays to communicate with others doing business in your industry as well. That's because in tough times other credit risks frequently crop up, according to James Carulas, a vice-president at Meaden & Moore, an accounting firm in Cleveland. "What you want to be vigilant against," he advises, "is the problem of winning a new customer that you don't really want. What happens is, some companies can't pay their existing suppliers on time--and can't get any new credit--so they suddenly want to do business with you instead. And maybe your salesperson will tell you, 'Hey, I've been trying to land this company for years and suddenly I got an order!' You've really got to do your homework here to make certain that the company is not a serious credit risk."

Controlling your accounts receivable is, of course, only part of the cash-flow equation. (See Managing Your Accounts Payable below.) Another important factor in the equation is maintaining your company's growth without letting costs go wild.

That was the challenge facing Jeffrey Austin, the president and chief operating officer of Austin Travel Corp., a travel agency based in Melville, N.Y., whose billings have doubled during the past few years to nearly $90 million. In Austin's business, the tough times started back in 1995, when fare wars, combined with industrywide commission cuts, clouded his revenue forecasts. "I get a daily cash-flow report so I can stay on top of every single expenditure," he notes. "At a certain point we began charging our customers a $5 fee each time we issued a plane ticket, because it was clear that we needed to find new ways to offset some of the costs we couldn't reduce any further." Thanks to those kinds of measures, Austin has preserved his bottom-line profit margins despite several years' worth of adverse market conditions.

Preserve your banking relationship
Granted, some growth companies weren't big enough, or established enough, to qualify for a line of credit even during the past few rosy years. But for many of those that could, the temptation has been powerful to leverage up--sometimes beyond the point of caution.

If your company fits into the latter category, now is the time to step back and take a dispassionate look at your credit picture and then fix any problems before they come back to haunt you. As Frederick Roberts of CDS notes, one of the key questions to ask yourself in difficult times is, Am I in a position of liquidity? He adds, "Related to that is the question, Can I identify nonproducing assets that the company has leveraged and find ways to reduce that leverage?"

Case in point: CDS owns a building that is mortgaged at $2.4 million. "But it's worth $3.9 million," Roberts says. "If I sell it, I'll reduce our leverage by more than $2 million, while adding another $1.5 million to our capital. That's money that can go directly after new revenues, without increasing our current market risks through leverage."

Another good way to reduce your company's debt load: ask yourself how much of a credit line it truly needs to do business and pursue its growth strategies--and if you're overextended past that point, try to figure out why. In far too many cases, entrepreneurial companies wind up borrowing from their bankers because of poor cash-flow practices (especially the failure to collect from customers on time). Reducing the average age of your outstanding receivables from 60 days to a more reasonable 30 or 40 can help you cut your company's borrowing and reduce interest charges.

Still, there are other points to keep in mind when evaluating your banking relationship these days. First and foremost, it pays to ask yourself one simple question: Does your banker feel calm about your company and its current conditions? Here's why that matters: an anxious, discontented loan officer is likely to ask you to pay down your credit line at the first sign of business difficulties, which are practically inevitable given the widespread nature of a global downturn.

Brett W. Kaplowitz, a vice-president at Potomac Valley Bank in Gaithersburg, Md., confides some signs that make him nervous when he detects them in corporate borrowers. "The first thing that tips me off is when I start seeing overdrafts in a company's checking account. I get reports on this daily, and I don't like to see patterns develop, either in the frequency of overdrafts or in the time it takes to get them paid off." Other troubling signs for him include a company's inability to comply with key loan covenants, especially those relating to liquidity or debt limits.

Usually, situations like those are a signal that there's a business crisis or a cash-flow crunch that executives hope to patch over by raising their borrowing level, on what they probably hope is a temporary basis. But John Evans, a partner at Arthur Andersen's Enterprise Group, based in New York City, warns that "you can't just go to a banker for more money when times get tough. You've got to go to him or her with information and a plan."

If, for example, your cash flow gets hit because one of your key customers stops paying promptly (maybe because all of his customers are Russian, Brazilian, and Malaysian), then your banker will be likelier to help you by easing your credit limit-- if you seem prepared to cope with that particular challenge. You can face it squarely by preparing a workout plan that states clearly how and when you expect to collect the problem receivable and others like it; you'll also want to include a description of how you'll minimize this type of risk in the future.

Above all else, be proactive: you will greatly increase your chances of success if you identify the problem rather than wait for your banker to make a nervous telephone call next time he or she picks up the newspaper. "The key is to think about your banker like a partner. If you have the attitude, 'God forbid my loan officer ever finds out about this one,' you'll only create more problems," Evans warns.

Collect those receivables!

Have you gotten a tad sloppy when it comes to your billing and collection procedures? Here's a quick blueprint for success:

1. Bill promptly. If you wait until the end of the month, your cash flow has already taken a hit regardless of how quickly your customer then pays.

2. Follow up, follow up, follow up. You can't do this enough. If you've got the staffing to handle it, the most effective procedure starts with a phone call to your customer as soon as the bill is mailed. (Be friendly here. You want to notify the customer that the bill has been sent, make certain he or she is satisfied, and give a gentle reminder that you expect payment within 30 days.) If the payment is late, you want to then schedule weekly telephone calls.

3. Track results. Make sure that all key executives receive a weekly update on outstanding receivables. Then set collection priorities based on the size of problem bills.

4. Involve top management. It's amazing how much more effective a collection call from a company's owner, rather than an accounting clerk, can be. So try it whenever receivables age past the 45-day stage.

5. Cut off the juice. If a customer develops a pattern of delinquency, there's only one way to handle it: stop fulfilling new orders.

--------------------------------------------------------------------------------

Managing your accounts payable

In an ideal corporate situation, you'd collect all your receivables quickly while paying your own outstanding bills at the latest stage possible. Here's how:

1. Time your payments according to their due dates, rather than following some artificial schedule within your organization. If your financial staffers don't want to write checks daily--and most won't--then set up a weekly payment schedule.

2. Plan for your cash-flow realities. To avoid big cash outflows, some companies schedule payroll biweekly and then pay their outstanding bills during the other two weeks of the month. Talk to your accountant about whether that makes sense for your business.

3. Avoid interest charges. If temporary cash-flow problems require you to stretch out your own payables, make certain that you aren't late with those bills that incur additional interest charges.

4. Communicate with your suppliers. Often, if you've built up a good relationship with a supplier and have been reliable in the past, you can avoid late charges by contacting the owner in advance, explaining your short-term problem, and requesting a payment extension. It's worth a phone call.

5. Circulate weekly payables reports to all key executives. Sometimes the first warning sign of a cash-flow problem comes when you realize your payments are falling behind. Don't leave it to your financial clerks to sound the alert.

A self-warning system

Are you convinced that global economic problems can't hurt your company? We hope you're right. But here are some danger signs to watch out for:

Aging receivables. Slight fluctuations, of course, do not matter. But what you want to avoid is either a pattern of average increases (a steady addition of, say, two days more each month will add up quickly and damage cash flow) or significant slowdowns in collections from your biggest customers.

Debt problems. Are you suddenly having trouble keeping up with your principal as well as interest payments? Or are business-related credit-card charges building up? Something is wrong within your cash-flow system if the problem persists for more than a month or two.

Late financial reports. When business conditions worsen, entrepreneurial companies sometimes get sloppy with key reports--perhaps because they don't want to face the bad news. Crack down on such situations immediately.

Late-interest charges. Are you paying your own bills so late that you're getting penalized financially? That's a sure indicator of bad news.

--------------------------------------------------------------------------------

Coping with international problems

Even the savviest financial managers can find themselves with unexpected problems on the international front. Just listen to Mendy Kwestel, a partner and director of entrepreneurial services at the accounting firm Grant Thornton in New York City. "We did quite a bit of work for a Brazilian firm," he explains. "That client doesn't dispute the work we did or the amount that we billed it. But they've been telling us that it's very difficult for them right now to pay us by check in dollars. They may be using it as a stalling technique. It never dawned on me that we could be vulnerable, until this happened."

Fortunately, international collection problems can be avoided fairly simply if your company institutes some inflexible rules. First, conduct the same kind of due-diligence investigation about prospective foreign customers (including taking a credit history and doing reference checks with other suppliers and bankers) that you would with U.S. customers.

Then make it a matter of course to require all foreign customers to obtain a letter of credit from a U.S. (or well-established foreign) bank; that guarantees that no matter what happens to your customer's business operations down the road, you'll be paid. Given that currency swings also present a risk--they can wipe out your profit margins if they move against you--it's also a good idea to require all payments in U.S. dollars. If foreign customers can't, or won't, comply with those requirements, then the safest course is simply to turn down their orders. "You may sacrifice some sales, but that way you won't wind up with foreign bills that you just can't collect," Kwestel says.

Even if you set strict procedures in place, you unfortunately won't be able to insulate your company against future problems that may result from having had loose procedures in the past. "Don't wait for overseas problems to present themselves," advises John Evans of Arthur Andersen. "The trick is to identify at-risk foreign receivables at the earliest stage possible and then move quickly to collect them. If they're large enough, that may even warrant a trip overseas yourself."

admin · Site Admin

You can't control the crazy, fluctuating world economic markets, but you can (and should) tighten your seat belt

Ask Frederick Roberts when he first began to get anxious about economic matters, and he doesn't even hesitate before replying. "It was when the news began to surface about all those problems in Asia," confides the president and chief operating officer of Certified Diabetic Services (CDS), a mail-order diabetic-supplies company based in Naples, Fla.

No, that isn't because his three-year-old company brings in any of its $9 million in sales from diabetics in the Far East. But when Asian companies started taking a nosedive, Roberts began worrying about a trickle-down effect that could possibly wind up affecting his company's credit picture. He explains, "When those companies were strong, they bought so much U.S. debt. Once it was clear that they were in trouble, I started asking myself what consequences that could have on our interest rates."

To Roberts, a former chief financial officer with years of experience in international finance, ignoring those early warning signs would have been foolhardy. "These days, you can't run a growth company without thinking globally," he emphasizes, adding, "That means continually trying to figure out which new factors or variables will likely affect your financial model--and adjusting your strategies accordingly." (It also requires the flexibility to keep readjusting in these unpredictable times, as Roberts needed to do when U.S. interest rates started falling rather than rising as he had originally expected.)

For some business owners, warning bells might have sounded when the bottom started dropping out of the U.S. stock market. Or maybe it was the collapse of the Russian economy, or Brazil's economic troubles, that created anxieties. Or maybe it was all those headlines about the $3.6-billion bailout of a hedge fund for the superrich (an especially painful reminder that rescue funds for small entrepreneurial companies are, shall we say, few and far between).

Business owners can't control the problems that have cropped up, and that may continue to develop, at various hot spots across the global economy. But they can--and should--take proactive steps now to shelter their companies from unwanted consequences of a worldwide downturn. After all, if a company's underlying financials are strong, it should be able to capitalize on competitors' weaknesses, prosper, and continue to grow, even in adverse economic times.

Protect your cash flow
To Seth Godin, president of Yoyodyne, a $5-million on-line direct-marketing company based in Irvington, N.Y., happiness for a business owner boils down to one simple thing: positive cash flow. At his three-and-a-half-year-old company, he confides, "we think about this every day. But there are a lot of people who forget, when times are as good as they've been during the past few years, that the business world is cyclical and that you need money to make money."

Sound cash-flow management is essential for any growing business. But here's the flip side of that reality: the stronger the economy is--and the faster a company is growing--the easier it can be to overlook cash-flow controls, sometimes without even suffering negative consequences...at least for a while. "The best thing about volatile economic conditions is that they remind managers to refocus their attention on the basics," notes Jeffrey Levine, a certified public accountant based in Newton, Mass., who warns his clients that it could take as long as 12 to 24 months for the full ramifications of today's economic problems to hit their businesses.

Granted, some companies' cash flow will take it on the chin much sooner than others', especially if they sell directly to countries or industries that are already experiencing difficulties. But there's only one way to begin, and the time to do it is now: evaluate your cash-flow controls, and tighten them promptly wherever it seems necessary.

If there is one single point of vulnerability in most companies, it's accounts receivable. That's because entrepreneurial companies almost invariably make the mistake--especially in their early or fast-growth stages--of paying much more attention to making sales than to collecting receivables.

That's never a great idea, but when the economy slows down and more customers start taking longer and longer to pay their bills, the result is a cash crunch. Factor into that the growing number of corporate bankruptcies that have dotted the U.S. business scene since 1997, and all those uncollectable bills could well turn the crunch into a cash-flow crisis for far too many companies.

Levine's advice? "Be very selective about whom you give credit to and also about how much credit you give them. Remember that you don't want just any customer. You want the kind who pays you and pays you promptly." Levine particularly likes the strategy used by a client of his in the wholesale distribution business. "Before even issuing credit, management carefully interviews customers--in person, if possible, and if not, in an extensive telephone conversation. That's in addition, of course, to checking the prospective customer's credit record and references. If the company decides to approve a credit relationship, the limit is set quite low for the first six months and increased in gradual intervals only if the customer's prompt payment history warrants it."

Of course, even the best of new credit policies won't protect you from experiencing problems connected with past sales. But the best line of defense is something that, unfortunately, many companies lack: a good tracking system that will alert them to collection problems and then trigger prompt action to resolve them. (See "Collect Those Receivables!" below.)

Here's a point to keep in mind, especially during economic downturns: collection problems often escalate in ways that your company can avoid by being willing to just say no to the wrong kind of sales. That takes organizational discipline. Don't send new shipments of goods or perform any new services in cases in which receivables are more than 45 days overdue. (That's not to say that receivables shouldn't be collected within 30 days, but you don't want to risk losing a customer when his or her check really might be in the mail.) Make certain that your sales team knows which customers are late payers, and insist that no new sales be concluded before old receivables are collected.

In some cases it pays to communicate with others doing business in your industry as well. That's because in tough times other credit risks frequently crop up, according to James Carulas, a vice-president at Meaden & Moore, an accounting firm in Cleveland. "What you want to be vigilant against," he advises, "is the problem of winning a new customer that you don't really want. What happens is, some companies can't pay their existing suppliers on time--and can't get any new credit--so they suddenly want to do business with you instead. And maybe your salesperson will tell you, 'Hey, I've been trying to land this company for years and suddenly I got an order!' You've really got to do your homework here to make certain that the company is not a serious credit risk."

Controlling your accounts receivable is, of course, only part of the cash-flow equation. (See Managing Your Accounts Payable below.) Another important factor in the equation is maintaining your company's growth without letting costs go wild.

That was the challenge facing Jeffrey Austin, the president and chief operating officer of Austin Travel Corp., a travel agency based in Melville, N.Y., whose billings have doubled during the past few years to nearly $90 million. In Austin's business, the tough times started back in 1995, when fare wars, combined with industrywide commission cuts, clouded his revenue forecasts. "I get a daily cash-flow report so I can stay on top of every single expenditure," he notes. "At a certain point we began charging our customers a $5 fee each time we issued a plane ticket, because it was clear that we needed to find new ways to offset some of the costs we couldn't reduce any further." Thanks to those kinds of measures, Austin has preserved his bottom-line profit margins despite several years' worth of adverse market conditions.

Preserve your banking relationship
Granted, some growth companies weren't big enough, or established enough, to qualify for a line of credit even during the past few rosy years. But for many of those that could, the temptation has been powerful to leverage up--sometimes beyond the point of caution.

If your company fits into the latter category, now is the time to step back and take a dispassionate look at your credit picture and then fix any problems before they come back to haunt you. As Frederick Roberts of CDS notes, one of the key questions to ask yourself in difficult times is, Am I in a position of liquidity? He adds, "Related to that is the question, Can I identify nonproducing assets that the company has leveraged and find ways to reduce that leverage?"

Case in point: CDS owns a building that is mortgaged at $2.4 million. "But it's worth $3.9 million," Roberts says. "If I sell it, I'll reduce our leverage by more than $2 million, while adding another $1.5 million to our capital. That's money that can go directly after new revenues, without increasing our current market risks through leverage."

Another good way to reduce your company's debt load: ask yourself how much of a credit line it truly needs to do business and pursue its growth strategies--and if you're overextended past that point, try to figure out why. In far too many cases, entrepreneurial companies wind up borrowing from their bankers because of poor cash-flow practices (especially the failure to collect from customers on time). Reducing the average age of your outstanding receivables from 60 days to a more reasonable 30 or 40 can help you cut your company's borrowing and reduce interest charges.

Still, there are other points to keep in mind when evaluating your banking relationship these days. First and foremost, it pays to ask yourself one simple question: Does your banker feel calm about your company and its current conditions? Here's why that matters: an anxious, discontented loan officer is likely to ask you to pay down your credit line at the first sign of business difficulties, which are practically inevitable given the widespread nature of a global downturn.

Brett W. Kaplowitz, a vice-president at Potomac Valley Bank in Gaithersburg, Md., confides some signs that make him nervous when he detects them in corporate borrowers. "The first thing that tips me off is when I start seeing overdrafts in a company's checking account. I get reports on this daily, and I don't like to see patterns develop, either in the frequency of overdrafts or in the time it takes to get them paid off." Other troubling signs for him include a company's inability to comply with key loan covenants, especially those relating to liquidity or debt limits.

Usually, situations like those are a signal that there's a business crisis or a cash-flow crunch that executives hope to patch over by raising their borrowing level, on what they probably hope is a temporary basis. But John Evans, a partner at Arthur Andersen's Enterprise Group, based in New York City, warns that "you can't just go to a banker for more money when times get tough. You've got to go to him or her with information and a plan."

If, for example, your cash flow gets hit because one of your key customers stops paying promptly (maybe because all of his customers are Russian, Brazilian, and Malaysian), then your banker will be likelier to help you by easing your credit limit-- if you seem prepared to cope with that particular challenge. You can face it squarely by preparing a workout plan that states clearly how and when you expect to collect the problem receivable and others like it; you'll also want to include a description of how you'll minimize this type of risk in the future.

Above all else, be proactive: you will greatly increase your chances of success if you identify the problem rather than wait for your banker to make a nervous telephone call next time he or she picks up the newspaper. "The key is to think about your banker like a partner. If you have the attitude, 'God forbid my loan officer ever finds out about this one,' you'll only create more problems," Evans warns.

Collect those receivables!

Have you gotten a tad sloppy when it comes to your billing and collection procedures? Here's a quick blueprint for success:

1. Bill promptly. If you wait until the end of the month, your cash flow has already taken a hit regardless of how quickly your customer then pays.

2. Follow up, follow up, follow up. You can't do this enough. If you've got the staffing to handle it, the most effective procedure starts with a phone call to your customer as soon as the bill is mailed. (Be friendly here. You want to notify the customer that the bill has been sent, make certain he or she is satisfied, and give a gentle reminder that you expect payment within 30 days.) If the payment is late, you want to then schedule weekly telephone calls.

3. Track results. Make sure that all key executives receive a weekly update on outstanding receivables. Then set collection priorities based on the size of problem bills.

4. Involve top management. It's amazing how much more effective a collection call from a company's owner, rather than an accounting clerk, can be. So try it whenever receivables age past the 45-day stage.

5. Cut off the juice. If a customer develops a pattern of delinquency, there's only one way to handle it: stop fulfilling new orders.

--------------------------------------------------------------------------------

Managing your accounts payable

In an ideal corporate situation, you'd collect all your receivables quickly while paying your own outstanding bills at the latest stage possible. Here's how:

1. Time your payments according to their due dates, rather than following some artificial schedule within your organization. If your financial staffers don't want to write checks daily--and most won't--then set up a weekly payment schedule.

2. Plan for your cash-flow realities. To avoid big cash outflows, some companies schedule payroll biweekly and then pay their outstanding bills during the other two weeks of the month. Talk to your accountant about whether that makes sense for your business.

3. Avoid interest charges. If temporary cash-flow problems require you to stretch out your own payables, make certain that you aren't late with those bills that incur additional interest charges.

4. Communicate with your suppliers. Often, if you've built up a good relationship with a supplier and have been reliable in the past, you can avoid late charges by contacting the owner in advance, explaining your short-term problem, and requesting a payment extension. It's worth a phone call.

5. Circulate weekly payables reports to all key executives. Sometimes the first warning sign of a cash-flow problem comes when you realize your payments are falling behind. Don't leave it to your financial clerks to sound the alert.

A self-warning system

Are you convinced that global economic problems can't hurt your company? We hope you're right. But here are some danger signs to watch out for:

Aging receivables. Slight fluctuations, of course, do not matter. But what you want to avoid is either a pattern of average increases (a steady addition of, say, two days more each month will add up quickly and damage cash flow) or significant slowdowns in collections from your biggest customers.

Debt problems. Are you suddenly having trouble keeping up with your principal as well as interest payments? Or are business-related credit-card charges building up? Something is wrong within your cash-flow system if the problem persists for more than a month or two.

Late financial reports. When business conditions worsen, entrepreneurial companies sometimes get sloppy with key reports--perhaps because they don't want to face the bad news. Crack down on such situations immediately.

Late-interest charges. Are you paying your own bills so late that you're getting penalized financially? That's a sure indicator of bad news.

admin · Site Admin

To stay in business, companies large and small need to maintain proper cash flow. A lack of operating capital is one of the main reasons that businesses fail. Here are some suggestions on how to make sure your building, remodeling or repair business has enough cash on hand:

1. Bill Promptly - It's easy to think about moving on to the next job, but it's important to send homeowners a detailed bill with obvious payment dates. Also, send a reminder about two weeks before the official due date.

2. Stick to Budgets - Know what you’re going to spend for new equipment, equipment maintenance, and on company supplies and stick to it. It can hurt your cash flow and cut into your profit margin.

3. Offer Early Payment Incentives - You'll be surprised at how offering a 1% to 2% discount for early payments will make your clients mail out their checks in a hurry.

4. Pay by Credit Card when Possible - Do this only if you're receiving 0% credit card offers for an initial period. It's a great way to keep cash handy and you can transfer the balance to another card once the initial time period is up.

5. Schedule Payments - Pay suppliers as late possible, avoid late fees, and plan out a payment schedule so that you're not paying everyone all at once. Spread out regular payments and try to arrange alternate payment dates to work with your schedule.

6. Avoid Slow or Non- Paying Customers - In your qualifying phase, make sure the homeowners have payment options in place. If they have trouble even coming up with the initial deposit, you might have to pull away from the job. Think of the man hours you'll spend trying to collect on the job during and after.

7. Barter Instead of Cash - See if you can find a barter arrangement for services. You might provide plumbing work in exchange for a website design - talk with your potential clients to find out if they provide a service you need.

8. Don't Spend it When You Get It - Avoid the urge to spend a portion of any payments you receive. Try to find an accountant or money manager who can watch over your transactions (possible barter?) And when you've got cash, don't stick it under the mattress. Place it in an interest-earning account and let it earn money for you.

9. Maintain Timely Collection Practices - Collections are not fun, but plan for some collection activity time during every week. You don't need to be mean and nasty, but you need to provide constant reminders for payment to make sure it doesn't get out of hand.