 |
Cashflow Management – The Key to Your Company Surviving and Thriving
Posted by randy on: 2005-11-04 11:43:57
Cashflow Management – The Key to Your Company Surviving and Thriving
What is Cashflow Management? Cashflow management is more than juggling bills as the receipts come in. If done well, it helps managers, owners and its vendors sleep at night. If done poorly, disasters ensue. Cashflow management is the process of projecting both cash receipts and cash disbursements to meet all the obligations and profitability of the business. This approach matches cash receipts from customers and clients with the disbursement needs from vendors and employees, along with loan facilities and investments.
The Problem. Most of the time, small- to medium-sized businesses are reactionary. The squeakiest vendor that calls and yells for payment usually gets paid. The problem is that this may be good for that vendor, but bad for the business and the remainder of its other vendors. You see, when you pay this vendor, many times there are less funds available for the others, and for your business. There are ways to deal with this problem that will help your business and the vendors you deal with.
Scheduling. Cashflow management is a planful approach to scheduling out the receipts you expect and matching the invoices you need to pay with the receipts. Instead of paying vendors at random, pay the vendors based on oldest invoices and delay paying the entire balance. By paying oldest invoices first, a couple of things happen. First, those vendors begin getting paid, which is good. They also start lowering the outstanding balance with your company based on aging. This is also good. But the best part is that you still have money remaining to pay other vendors. So, by paying your vendors this way, you will satisfy many vendors at the same time without compromising your own cash.
Communication. Once you have scheduled out the payments to your vendors, communicate with them. If you don’t contact them, they will probably call you, indicating that your good standing is being called into question. By notifying vendors in advance of the payment schedule, you are proactively establishing yourself as a good honest customer ¾ the kind of customer everyone wants.
Lending. Loan acquisition is a very important piece of cashflow when you simply do not have all the funds needed to pay your employees and vendors. Some lending comes cheap and some is expensive, depending on you and your company’s credit worthiness, the strength of your customers, the history of your business, and other factors. Basically, if you have all of the above, you will have an easier time finding and securing relatively inexpensive financing. If your business is weak in the areas listed above, it will be a difficult process and, if you find the loan, it will be expensive. So, how do you go about securing a loan? Begin by compiling a comprehensive financial package. Providing that to the lender at the first meeting will facilitate a smoother and faster loan approval process. The recommended items could include 2 years historic financial statements of the business (preferably prepared by a CPA), a financial projection for the next 2 years (also preferably prepared by a CPA), a current financial statement for all the owners of the business, 2 years income tax returns for these owners, an aging of your company’s receivables and payables (in detail), and payroll tax returns. If you are looking to finance your equipment or property, also enclose sales invoices and any information relative to the property’s market value. Once you have the information together, you need to shop for a bank or lending institution that will make the loan. Unfortunately, all banks and lenders are different. They each have their likes and dislikes in terms of loans that they are looking to make. Some are more aggressive in the types of loans they are looking for, and some are more conservative. Some price aggressively, while some take a more staid approach. Once you have compiled your package and a list of lenders, arrange a meeting with each one. Be ready to pitch them on your business, its needs and its potential as a customer of theirs. You need to listen to the lender tell you how willing they might be, as well as some of the other information they will need to fully analyze the credit. If you feel as though there is good potential for the loan to go through, go back to work and pull together the information they need. Remember, the sooner you give them the information they need, the sooner they can have the loan committee review your request.
Investments. If your business is lucky enough to have investments, then cashflow management can preserve your investments. Just because you have investments does not mean that you do not need to manage your cashflow. Instead, it may be even more important. You see, you need to protect that investment. It will not protect itself. If you schedule out your cash receipts and disbursements, you will find out very quickly if and when you will need to use your investments to meet obligations. Better to know this in advance than to find out later and have to scramble. Do not overlook the important element of lending. You may find that it is less expensive to borrow than to cash in on some of the investment. Also, if you are not already doing so, consider investing your excess cashflow in overnight repurchase agreements with your bank. If done right, you might yield additional investment dollars by effectively managing your cashflow.
Summary. If you manage your cashflow effectively, you will be able to anticipate and manage the needs of your business, rather than to react to them. This will result in positive relationships with vendors and demonstrated ability to pay on time every time, plus have cash in your bank (or hopefully, investment) account.
About the Author. Don Paris is a CPA and Consultant with over 25 years experience helping small- to medium-sized business achieve their goals with cashflow, profitability and other financial needs. He is a Certified Public Accountant with a Masters Degree in Taxation and a Post Masters in Electronic Commerce. Need more information, or help employing this information in your company? Call Don Paris, CPA and Consultant at 301-869-5093 or send email to donaldparis@comcast.net .
What is Cashflow Management? Cashflow management is more than juggling bills as the receipts come in. If done well, it helps managers, owners and its vendors sleep at night. If done poorly, disasters ensue. Cashflow management is the process of projecting both cash receipts and cash disbursements to meet all the obligations and profitability of the business. This approach matches cash receipts from customers and clients with the disbursement needs from vendors and employees, along with loan facilities and investments.
The Problem. Most of the time, small- to medium-sized businesses are reactionary. The squeakiest vendor that calls and yells for payment usually gets paid. The problem is that this may be good for that vendor, but bad for the business and the remainder of its other vendors. You see, when you pay this vendor, many times there are less funds available for the others, and for your business. There are ways to deal with this problem that will help your business and the vendors you deal with.
Scheduling. Cashflow management is a planful approach to scheduling out the receipts you expect and matching the invoices you need to pay with the receipts. Instead of paying vendors at random, pay the vendors based on oldest invoices and delay paying the entire balance. By paying oldest invoices first, a couple of things happen. First, those vendors begin getting paid, which is good. They also start lowering the outstanding balance with your company based on aging. This is also good. But the best part is that you still have money remaining to pay other vendors. So, by paying your vendors this way, you will satisfy many vendors at the same time without compromising your own cash.
Communication. Once you have scheduled out the payments to your vendors, communicate with them. If you don’t contact them, they will probably call you, indicating that your good standing is being called into question. By notifying vendors in advance of the payment schedule, you are proactively establishing yourself as a good honest customer ¾ the kind of customer everyone wants.
Lending. Loan acquisition is a very important piece of cashflow when you simply do not have all the funds needed to pay your employees and vendors. Some lending comes cheap and some is expensive, depending on you and your company’s credit worthiness, the strength of your customers, the history of your business, and other factors. Basically, if you have all of the above, you will have an easier time finding and securing relatively inexpensive financing. If your business is weak in the areas listed above, it will be a difficult process and, if you find the loan, it will be expensive. So, how do you go about securing a loan? Begin by compiling a comprehensive financial package. Providing that to the lender at the first meeting will facilitate a smoother and faster loan approval process. The recommended items could include 2 years historic financial statements of the business (preferably prepared by a CPA), a financial projection for the next 2 years (also preferably prepared by a CPA), a current financial statement for all the owners of the business, 2 years income tax returns for these owners, an aging of your company’s receivables and payables (in detail), and payroll tax returns. If you are looking to finance your equipment or property, also enclose sales invoices and any information relative to the property’s market value. Once you have the information together, you need to shop for a bank or lending institution that will make the loan. Unfortunately, all banks and lenders are different. They each have their likes and dislikes in terms of loans that they are looking to make. Some are more aggressive in the types of loans they are looking for, and some are more conservative. Some price aggressively, while some take a more staid approach. Once you have compiled your package and a list of lenders, arrange a meeting with each one. Be ready to pitch them on your business, its needs and its potential as a customer of theirs. You need to listen to the lender tell you how willing they might be, as well as some of the other information they will need to fully analyze the credit. If you feel as though there is good potential for the loan to go through, go back to work and pull together the information they need. Remember, the sooner you give them the information they need, the sooner they can have the loan committee review your request.
Investments. If your business is lucky enough to have investments, then cashflow management can preserve your investments. Just because you have investments does not mean that you do not need to manage your cashflow. Instead, it may be even more important. You see, you need to protect that investment. It will not protect itself. If you schedule out your cash receipts and disbursements, you will find out very quickly if and when you will need to use your investments to meet obligations. Better to know this in advance than to find out later and have to scramble. Do not overlook the important element of lending. You may find that it is less expensive to borrow than to cash in on some of the investment. Also, if you are not already doing so, consider investing your excess cashflow in overnight repurchase agreements with your bank. If done right, you might yield additional investment dollars by effectively managing your cashflow.
Summary. If you manage your cashflow effectively, you will be able to anticipate and manage the needs of your business, rather than to react to them. This will result in positive relationships with vendors and demonstrated ability to pay on time every time, plus have cash in your bank (or hopefully, investment) account.
About the Author. Don Paris is a CPA and Consultant with over 25 years experience helping small- to medium-sized business achieve their goals with cashflow, profitability and other financial needs. He is a Certified Public Accountant with a Masters Degree in Taxation and a Post Masters in Electronic Commerce. Need more information, or help employing this information in your company? Call Don Paris, CPA and Consultant at 301-869-5093 or send email to donaldparis@comcast.net .
Post new Comment
This site does not allow anonymous comments. Registered members can login to participate. Registration is free and takes only a few seconds