Monitoring Cash Flow--The Key to Business Success
By Bill Littlejohn
Cash flow can make or break your business. This fact is known by most business owners and deserves constant attention. Business cash flow has been defined as the movement of money into and out of your business. The cycle of cash inflows and cash outflows will always determine the solvency of your business.
In order to ensure a continuing positive cash flow, it is necessary to establish and perform an ongoing cash flow analysis on a regularly scheduled basis. This type of analysis will provide all the necessary details for effective cash flow management, which is the process of monitoring, analyzing, and adjusting the business' cash flow. Avoiding cash shortages is the ultimate purpose of cash management for businesses.
A cash flow analysis can be accomplished by a serious examination of components in the business that affects cash flow. Some of these components are accounts receivable, inventory, and accounts payable. This examination will help identify potential and existing cash flow problems. In addition, it will also provide an opportunity to establish policies and procedures to solve or greatly improve these situations.
First, let's take a look at accounts receivable. It would be great if we were all paid at the point of sale, but unfortunately, that is not the case. By tracking accounts receivables, you will be able to identify the late and/or slow paying customers. With this information and proper consideration, the credit terms of certain customers may require changes.
For example, you might consider a policy requiring partial payment with the order, or you might institute a policy of cash on delivery (c.o.d.).
Other specific techniques for improving receivables might include the following:
- Offer small discounts to customers who pay their bills early.
- Prepare customer invoices immediately as soon as orders are completed.
- Require credit checks on all new noncash customers.
Be sure you have an effective collection policy in place. Aging of receivables may be necessary and if so, there are a number of available software programs to assist you.
Next, let's take a look at inventory. This analysis may show that you are carrying excessive inventory for contracted sales. If this is the case, and since inventory is like cash, then you may possibly need a reduction in the amount of inventory purchased. You would rather have that "cash" working for you than sitting on warehouse shelves. Consider a supplier that could provide materials on an as-needed basis. With less inventory, you might be able to reduce the size of your warehouse facility. Scaling down could save real estate expenses and with less space, you would need fewer employees and less equipment to manage the inventory. The cash you save in this area would be freed up for other purposes.
Finally, let's look at accounts payable. When managing a business, you have to watch expenses even if you are experiencing increased sales. Any time you notice your expenses exceeding your sales, you need to examine your costs so you can cut or control them. The following are some ways for managing payables:
- Consider taking the allotted amount of time for your accounts payable. This could free up some of your cash for possibly 30, 60, or 90 days.
- Ask certain suppliers for a reasonable discount for early payment.
- Make payments on the day they are due by using electronic funds transfer. You will be current while using your funds longer.
After you conduct a periodic cash flow analysis, you may discover your problem is not cash flow, but a sales volume problem. If this is the case, then you should seriously consider an effective marketing plan to acquire additional customers and sales.
With the results of a periodic cash flow analysis, you will review all aspects that affect your cash position. This will provide an opportunity to test ideas and measure the impact for future benefits to your company. For example, you might be able to take advantage of opportunities for growth, such as a buyout of another company at a discount because you are able to negotiate an all-cash settlement.
If you do not have an effective cash flow management policy in place, be sure to get the ball rolling in this area. Normally a written policy sanctioned by the company owner can be the most effective. Monitoring a businessŐ cash flow is critical to its survival.
Bill Littlejohn is a business counselor for the South Carolina Women"s Business Center and SCMEP. Prior to SCMEP, he was the first state director of the Small Business Development Center (SBDC). He spent most of his career in the banking industry, where he retired as senior vice president for South Carolina National Bank. He can be reached at 803-252-6976 ext. 234.
