Thursday, July 1, 2010

Managing Your Cash Flow

Ten Tips to Manage Cash Flow

Cash flow is one of the top concerns business owners are discussing with bankers these days. They need help managing their cash flow, and they're looking for advice.

Cash flow is the movement of funds in and out of your business. You can track this weekly, monthly or quarterly. Positive cash flow is when the cash entering your business from sales and accounts receivable is more than the amount of cash leaving your business through accounts payable, monthly expenses and salaries. Negative cash flow occurs when your outflow of cash is greater than your incoming cash.

Cash flow is one of the most critical components of success for a small business, but many business owners who are launching new enterprises don't realize how important it is. Remember, cash flow is not the same as profit--profit is revenue minus expenses. We often counsel entrepreneurs not to get confused into thinking their profit and loss statement (P&L) will help assess their cash flow.

The SBA has a worksheet you can download that may be helpful in determining your cash flow. You may also wish to seek advice from your banker or financial advisor.

Here are tips to help improve your cash flow:

1. Collect receivables and accelerate receipts. Speed up collection of your merchant services accounts. Aggressively collect receivables and rein in credit and terms. Offer discounts to clients who pay quickly and charge a penalty to those who do not. To speed up receipt and processing of receivables, turn to a financial institution that offers a lockbox service, enabling customers in far locations to mail payments directly to the bank. Also, centralizing your banking at one bank may help speed the process.

2. Increase sales. Attracting new customers takes time and money, and may temporarily weaken your cash flow. Selling more to current customers is an option that may increase your cash flow. When you do so, however, make sure your customers can pay.

3. Tighten credit requirements. If you extend credit to your customers, be sure to assess their credit history. Ask them to fill out a credit application to determine whether they will be able to pay for the goods or services they are purchasing.

4. Consider every expense. Look carefully at each expense and find ways to cut costs that don't add to your bottom line.

5. Trim inventory. Keep levels as low as possible.

6. Delay hiring. Allow positions to remain unfilled if staff members leave, or consider part-time, temporary or consulting services for support.

7. Seek credit. For qualified business owners, securing credit may be a smart way to obtain additional funding and help maintain cash flow. Even if you don't have an immediate need for the money, it may provide a cushion if business slows in the future.

8. Recycle and reuse. Recycle or sell equipment that you only use occasionally. Negotiate to lease or rent equipment and software only when needed.

9. Consider refinancing. Watch for a rate that best suits your situation, and ask your banker to alert you to falling rates.

10. Manage your budget. Create weekly reports to monitor expenses. If your spending exceeds the budget, quickly step in to investigate and take steps to curtail it.

Business owners who learn how to manage cash flow may increase their probability of success. Take time to assess your cash flow and ask for advice from your banker when needed.

By Martha Pineda

Published June 21, 2010 by

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