Cash Flow Imperatives - Xerox [PDF]

If cash is king, it's no surprise that cash flow is the lifeblood of business. In fact, cash flow is among the top conce

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Tips, Insights & Tactics Cash Flow Imperatives If cash is king, it’s no surprise that cash flow is the lifeblood of business. In fact, cash flow is among the top concerns of North American small business owners, as noted in a survey conducted by Visa.* Whether you own the company or just work there, understanding the importance and dynamics of cash flow will help you professionally and personally.

Get an accurate picture. “How’s business?” is the question often on the mind of business owners. The answer depends on a good record keeping system that includes three essential financial statements, each a snapshot of how things stand in a moment of time.

1) Income Statement Also referred to as the Profit and Loss (P&L) statement, the income statement details all of your company’s incoming and outgoing financial activity over a specific period of time. It’s the bottom line, the Net Income (or loss), all income minus all expenses. You can do the same for your personal finances to help identify where your money goes.

2) Balance Sheet A balance sheet records assets minus liabilities, the equity or net worth of the company. Assets are anything of value, from computer systems to raw materials that will be used to make products; from cash on hand to outstanding invoices yet to be collected. Liabilities are anything owed, from loan balances to employee salaries due; from taxes to rent; even the cost of goods or services owed to customers. A good rule of thumb for a healthy balance sheet is to have at least two-and-a-half times more assets than liabilities.

3) Cash Flow Statement Knowing how much cash is available is critical to keep your business running. A cash flow statement tracks the inflow and outflow of cash in three categories: Operating Activities, Investing Activities and Financing Activities. It shows you how much cash is readily available for upcoming expenses, new opportunities, expansion and emergencies.

Tips, Insights & Tactics Cash Flow Imperatives

Plan your future.

Debt Collection

Include sections for cash inflow (sales), cash outflow (expenses) and your cash balance. In business or at home, aim for a minimum cash reserve of three to six months of your average operating expenses.

Clearly indicate your payment terms on your invoices and in your proposals. Thirty days is typical for many small businesses, but not all. Whatever terms you choose, monitor and follow-up whenever a payment is overdue. Set up a collection process yourself or hire an outside specialist.

A realistic budget is a great tool to help you track your success and course correct as needed. It will help you decide when to invest, manage your growth, track seasonal activity, weather setbacks and generally help you maintain better control of your finances.

Consider adding a penalty percentage for late payment. Conversely, you could offer a discount on invoices paid early. Encourage payment from credit cards. You get your cash immediately, and customers still have 30 days to pay off their card.

Just as important as knowing where you are financially right now, you also need to know where you’re headed — in your business and personal life. For that, you need a budget plan. Align your budget with your fiscal year, usually the same as the calendar year. Plan your annual budget three months in advance. It’s a living document, so revisit it as often as the needs of your business requires.

The first step in debt collection is invoicing. If you haven’t sent a bill, you can’t collect on it. Make invoicing a top, daily priority. Set up a system to track invoices and trigger follow-up on what’s due and overdue. Get to know your customers’ payment behaviors. Who’s reliable, careless or inattentive, and routinely late? Personalize your debt collection tone and tempo accordingly.

If the nature of your work is long term or involves large upfront investment, build an initial deposit and/or progressive billing into your proposals. Or bill separately for labor and materials. And be sure to consider any sub-contractors you hire, who have cash management challenges of their own.

Pricing Low margins may negatively affect cash flow. Leverage your strengths when pricing. Large organizations leverage volume purchasing power so they can offer low prices. Small businesses know more about their customers’ needs and can add value to their prices with personalized customer services. Prices for products and services should include everything it costs to provide them — materials, payroll, marketing, rent, etc. Plus, enough margin to provide profit.

Manage your cash flow. When you monitor and maintain the essential financial statements and your budget they’ll help you spot potential cash flow problems early. It’s far better to act proactively than to react after the damage is already done. In general, what keeps cash flowing is to collect what’s owed quickly and pay out as slowly as is reasonably possible. When that’s not enough, the usual problem areas are low sales, debt collection, pricing and overhead.

Increase Sales There are literally volumes of information available on this topic, yet no combination of sales and marketing tactics guarantees success. Explore what’s worked in the past, what competitors do, your industry’s best practices and outside resources such as books, professional organizations, consultants and agencies. Seek expertise with direct or transferable experience with your type of products or services.

Pay attention to your market, key competitors and the local economy to set and adjust your pricing as needed to attract and maintain the type of customers your business is built for— and the cash flow it requires.

Tips, Insights & Tactics Cash Flow Imperatives

Overhead Payroll is a large part of every business’s operating expenses. To optimize operations strive to align the workload with workforce capacity. If job descriptions or designated areas of responsibility aren’t keeping everyone busy, contributing to business priorities, consider making adjustments until an optimal mix is reached. Outsourcing can be a good option, especially for specialized expertise or tasks of short duration. It may be less expensive and more productive to hire temporary help rather than pay employees overtime and risk the associated burnout. When hiring contractors or services, require a Service Level Agreement (SLA) to document expectations, cost, any required training, maintenance, upgrades, etc. When you purchase a service you offload the responsibility and risks of infrastructure, maintenance and support to the vendor. A good way to improve operational efficiency is to document processes. The act of flowcharting procedures often helps identify areas of improvement. Or simply ask the people that actually do the work, how it could be improved. Interview customers to understand what’s of greatest value from their perspective. Focus on improvements there. Stop doing things that don’t matter to customers. A second key expense is inventory, cash invested in materials or products waiting to be sold and turned back into cash. The more efficiently you can turn inventory, the better your cash flow. Inventory levels are affected by sales, marketing, merchandising — even the time of year. Set inventory levels accordingly, and set up a process to monitor the elements that affect levels so you can keep your inventory turning efficiently.

Cash Sources

There are several short-term options available to generate cash quickly to fill a temporary shortfall. Some are more appropriate for sole proprietors, others for small businesses. • Temporarily suspend your paycheck or distribution • Make a temporary, personal loan to your business • Ask family or friends for a temporary, personal loan • Home equity loan • Take a “credit card loan” • Secure a Line of Credit • Equity Partner(s) • Bank loan • Refinance an existing loan with longer terms to lower your payments • Sell outstanding invoices to a Factoring Company • Secure a Federal or State Grant If you’re successful enough to regularly generate surplus cash, consult with a small business investment advisor to put your money to work. It’s easier to secure a bank loan when you can demonstrate a good, reliable cash flow. If you’re contemplating a loan, apply when your business is doing well, not as a last resort. Lenders are unlikely to risk funds on a business with troubled finances.

Summary

Whichever cash flow improvement strategies you adopt, don’t keep them to yourself. Get everyone involved with the effort to improve inventory turns, record keeping, or workload balancing. With the right processes in place your cash on hand should start flowing more smoothly.

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Tips, Insights & Tactics Cash Flow Imperatives

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