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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)

Small Businesses Can Beat Cash Flow Woes

All growing businesses need cash - to meet payroll, satisfy debt obligations, finance inventory purchases, and keep the business going. To ensure a positive cash flow, small business owners must carefully monitor their financial processes. The following strategies, supplied by the New Jersey Society of Certified Public Accountants (NJSCPA), focus on improving cash flow by accelerating inflow and delaying outflow.

Tighten Inventory
Overstocking inventory can tie up significant amounts of cash. To maximize cash flow, small business owners need to maintain an appropriate level of inventory and a good mix of merchandise. Periodically check inventory for old or outdated stock, and consider dropping those products that tie up cash and replace them with faster moving items. It's also a good idea to regularly gauge your inventory turnover to make sure it is within industry norms. And think twice before committing to volume discounts offered by suppliers. Unless you are sure you can move the merchandise quickly, you will tie up valuable cash.

Invoice Early and Often
Make every effort to get an invoice in the mail the day the order is shipped or the job is completed. If you're working on a project that will take a long time to complete, arrange to get an advance deposit or retainer from the customer. A deposit not only helps your cash flow, but also solidifies the relationship between you and the customer. Getting a work-in-process billing system implemented will help maintain the inflow of cash. The balance due should be billed in stages based on mutually-agreed completion dates.

Carefully Evaluate Creditworthiness of Customers
Making the decision to grant credit is an important and delicate business function. Be sure to adequately check credit information and obtain several trade and bank references before extending credit to customers. A commercial credit service can provide you with an overview of a firm's general financial condition as well as a record of their payment history.

Manage Accounts Receivable
A properly managed accounts receivable portfolio can significantly expedite cash flow and support cash requirements. There are a number of ways to ensure that outstanding receivables are kept to a minimum. You can offer discount inducements for balances paid within 10 days. Or you can analyze the payment history of your clients and institute more rigid requirements for the historically delinquent among your customer base. Develop collection procedures for handling past due accounts and follow them religiously. The longer a customer's balance remains unpaid, the less likely it is that you will collect the full payment. If you have customers with real financial problems, negotiate a payment plan with the customer and monitor it frequently. Be careful not to give your customers too much leeway before turning over severely delinquent payments to a collection agency or an attorney - or you may find yourself out of luck.

Monitor Accounts Payable
Managing your accounts payable plays an important role in optimizing your business's cash flow. Take the maximum amount of time allowed, without incurring late fees or interest charges, to pay your suppliers. This permits adequate time to collect on receivables without spending money on sort-term credit lines. For added efficiency, you may want to talk to your banker about lock box services, ACH (automated clearinghouse) payment authorizations, and other services that speed up the collection of accounts receivable.

Consider Leasing Instead of Buying
By leasing computer equipment, cars or other tools needed to expand your business, you avoid tying up cash or lines of credit that might be better used for meeting your company's day-to-day cash requirements. In the long run, leasing generally costs more than buying, but these costs often can be justified by the cash flow benefits.

Press Suppliers for Discounts and Better Payment Terms
Seek discounts from suppliers you order from regularly and renegotiate better payment terms as well. Although most suppliers quote a 30-day term, some may be willing to offer extended terms as a competitive benefit. Back up your request for discounts and better terms with facts about your payment history, potential of future business and your creditworthiness. Also, beware of buying more than you expect to sell, regardless of how favorable the price or credit terms offered.

You may be surprised to see how much you can improve your company's cash flow by following these steps. A CPA can provide you with additional information on managing the flow of cash in your business.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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