Cash Flow « The Latest Profit Points

Archive for the ‘Cash Flow’ Category

The empty spot on your bench

Wednesday, May 25th, 2011

Ask any business owner if they ever have enough money or enough people to get the job done and their answer is probably a guffaw and a resounding “NO!”

When you ask them who they need (in a perfect world) you’ll hear they need sales people, operations people and line workers. Rarely do they say they need a Chief Financial Officer (CFO.)

Ask any business owner that has left their accountants’ office during tax time still puzzled on why they owe so much to Uncle Sam or how they could have made so much on paper but don’t see it in the bank. Many accountants can’t answer these questions. A CFO can.

If you are worried about looking foolish in front of a CFO, or are embarrassed that you don’t have a grasp on your numbers, don’t be. You aren’t alone.

If you have a handle on your financials but still find yourself with questions about product line or customer profitability, whether you should pay back your loan or take the money and use it to grow, or why you never seem to have enough cash, you should consult your CFO.

If you believe your CFO is strictly a glorified bean counter, you have found the wrong person for the job. If you think that a CFO is really short for CF-”no”, that is, someone who will shoot down all your plans or ideas, you’ve found the wrong person.

If you are looking for someone to help you map out your growth, “run the numbers” and provide you options backed by analysis, and you naturally turn to your CFO, you know you have the right member on the team.

But most businesses don’t have that team member in place. There is an empty, yet critical, spot on their bench. It comes down to one change in mindset on the part of the business owner:

Hiring a CFO isn’t an expense, it’s a growth strategy.

A CFO can provide you with the best springboard for growth: information.

Information can be in the form of financial analysis and trends or forward-looking projections. It can be a scenario analysis (“if I do X, then my profit could be Y”) or a post-mortem (“why did this job run over budget?”) A CFO with good business sense can take your operational and financial data to give you a picture of the effectiveness of your daily operations. That’s pretty powerful stuff.

So, you can muddle along and find out what works through gut instincts or trial and error. You can hire another sales person or line worker and you can grow in increments. Or you can fill that empty spot on your bench with a CFO, even on a part-time or consulting basis, and grow exponentially. You just need to change your mindset.

Posted in Accounting/Bookkeeping, Business Model, Cash Flow, Cost Cutting, Financial Policies & Procedures, Forecasting, Increase revenue, Labor, Planning, Pricing, Recession Busters | 1 Comment »

Let’s talk about money—YOUR money

Monday, February 28th, 2011

OK, I’ll be frank. Sometimes business owners can be the greatest downfall of their own companies. You’ve probably heard the hundred ways this is possible from management and HR issues to lack of “business” skills. I’m in the business of finance, so I’ll talk about only one—handling money.

There are two scenarios where a business can be jeopardized by the way the owner handles money:

When the owner takes too much cash out or depends on the business to sustain their lifestyle.
When the business owner lends too much to the business and seriously jeopardizes their personal financial wellbeing.

I’ve seen both and it is pretty ugly.

In the first case, a business is doing well and kicks off a ton of cash. After a year more or less of great returns the owner begins to lose the “bootstrappy-ness” of their beginnings and feel things have been going well enough to buy a bigger house or upgrade their car.

They start to grow into their business’ cash flow.

Some start taking more out in draws—a lot more. And if they aren’t careful, some take out more than what the business is generating. I’ve seen business owners run up hundreds of thousands of dollars on the business line of credit to purchase personal items.

The biggest problem with this: the business is starting to starve.

That cash that gets sucked out to buy the car or the house should have been left in the business for the “rainy-day” fund—or the “hire a new employee” fund—or “upgrade our systems” fund—or the “new product development” fund. But as soon as it hits the business bank account it is whisked away.

Growth in the business stops or slows significantly.

What is more devastating is what happens when the market turns south. The credit line is almost maxed—and those steady cash withdrawals—well, they aren’t there for the taking anymore. So what happens to the owner?

They still have the mortgage to pay on the large house and on the fancy car. Their kids are enrolled in private school. They have bills to pay—but the cash isn’t coming in. They head into the death-spiral of cutting costs in the business, and suffocating it even more before they decide to start calling the bankruptcy attorneys—for their business and for themselves.

On the other end of the spectrum are the other business owners—those that put all of their life savings and then some into the business. They become maxed out.

They have a payroll– and they’re not on it.

Or if they are, they take a measly pittance for the work they do. They have tapped all their resources and have no other source of funds—the banks won’t lend to them because they have no collateral (it’s all in the business) they aren’t generating the returns or aren’t in a sexy-enough business to win the attention of private money or all other sources have proven to be dead ends.

The American dream of owning a business turns into a nightmare, exhausting them and exhausting their families who bear the burden.

The problem with these companies is that, in most cases, there is something broken within the business.

The business owner is too busy fighting fires to step back and see the real problems. A colleague of mine has a great question he poses to entrepreneurs. “If your waste basket caught fire every day, and you had to put the fire out, how long would it take you until you got fed up enough to figure out what’s making it burst into flames?”

These business owners they feel they have to work harder to get to the “Mecca” where the business is kicking off great returns. Meanwhile, they have, in essence, lent their personal money to their clients by extending terms to them, have issues with late payers and have costs that are out of line with their pricing. They don’t see this—they just are reaching for the next sale.

What they don’t realize is that that next sale starts the cycle again.

These two situations may seem like opposite ends of the spectrum but they are really the same issue–the line between business money and personal money is blurred.

When we have these conversations with business owners, we’re seen as naysayers and meddlers. In either case our message isn’t one the owner wants to hear.

The message is simple—it’s about balance.

It is about balancing the need to leave enough money in the business—or not contributing more—and giving the owner enough compensation to enjoy the lifestyle they want to live.

There is no magic formula on calculating the balance, unfortunately. It’s a give-and-take– an imperfect science. Because the flow of cash between business and personal are so intertwined, when one or the other is way out of balance the end result could be disastrous. It’s an important part of planning, and one that should be considered with as much importance as buying a piece of equipment or buying a new house.

Posted in Cash Flow, Planning | No Comments »

How well have you figured out the 4Ms of business?

Sunday, January 9th, 2011

For any business to be successful, they need to have a good plan looking at the 4Ms of business:

Money. Do you have enough money so that your business is paying its own bills? Or does the owner or investors need to sink their funds into the business to keep it afloat? If you are a startup this is OK and expected—there is a lot of investment required before you make your first sale and beyond. However, for established businesses this may be a warning sign of that one of the other “Ms” isn’t working.
Manpower. Do you have the right number of people doing the right amount of work? Payroll is typically one of the largest expenses for businesses, but we are often amazed how often businesses get this wrong. Too many high-paid people doing low-level work. Inefficiencies and dead wood. Star employees with untapped talent. As Jim Collins says in his book Good to Great, “get the right people on the bus, the wrong people off the bus, and the right people in the right seats.” Get the Manpower equation right and watch your business grow.
Marketing. Fancy brochures? Great. Website with Flash? Wonderful. Nobody buying what you are selling? That’s a problem. Beyond the fancy collateral, how often have you stopped to find out why customers buy from you? What is the value you bring to your customers and how much are they willing to pay for it? Have you defined who is your ideal client and how will you reach them?
Making it Happen. This is your operating plan. Can you deliver what you said you can and how much will it cost to do so? Will there be enough cash to pay the bills? If not, go back to #1 and repeat. Unfulfilled customer orders, bad customer service, poor quality all can drive a customer away. Great customer service is wonderful, but if it costs you more to deliver your product or service than the price you charge that can lead to serious problems.

The rule for the 4Ms is review, revise and repeat. As you kick off the new year, how are you planning for the 4Ms?

Posted in Business Model, Cash Flow, Labor, Planning, Pricing | 2 Comments »

When your customer shows sign of financial trouble

Sunday, September 20th, 2009

The importance of having a strong and open relationship with your accounts in tough economic times is critical and it is important to pay attention to the warning signs in your business before they hit you where it hurts. Mary Repke, owner and “Chief Bag Lady” at Coakley Business Class, knows this first-hand. As a manufacturer of upscale professional women’s bags, Coakley relies on a series of distributors to get products to stores. When some of her distributors were experiencing financial hardships, Mary was quick to act. By doing so she minimized her exposure to customers closing their doors and jeopardizing her company’s future as well.

Mary has these suggestions to minimize risk with customers:

Pick up the phone and make the call: As you recognize that your orders are slowing down you need to contact your customers and find out what is going on with them so you can get a more clear picture of what the potential impact on you will be.

Try to collect on all open invoices according to terms.
If your customer moves toward slow pay because they can’t make a full payment, help them out by offering to take payment on a credit card or a monthly payment plan for three months (this may give them extended terms or cost you a few points, but you have a better chance of getting paid in full than not at all).

Make sure your paperwork’s on top.
Take the time to resend a billing statement with back copies of all open invoices every month.
You want your paperwork on top of their papers, not buried at the bottom.

Be the squeaky wheel.
Take the time to make collection calls. The squeaky wheel gets paid first.

Credit card only, please. If they have an opportunity to sell more of your product during this time, put all new orders on credit card only sales so you benefit from the sale and don’t incur additional risk.

Don’t over-ship–period. You know what is normal sales flow with your accounts so be very mindful of this during a recession. You don’t want to be over exposed. It’s better to reduce your minimums and get paid than have a big sale on your books that doesn’t get paid.

Do your own financial housekeeping. As your sales and revenues slow down, and your accounts begin to pay slowly, you need to immediately cut your expenses and be very mindful of what your fixed expense requirements are on a weekly and monthly basis.

Like it or not, you need to generate a few extra monthly financial reports so you can stay on top of things.
Cancel any truly unnecessary expenses or programs you have underway. Prioritize your spending by things that drive revenue.
If you do get into trouble, it is very important to take the initiative to contact your vendors and let them know about your situation. Be very honest with them and ask them to work with you as you commit to a payment plan system to continue to send them money as you receive it until you can move back into a profitable cash flow situation.
Keep focused on getting your business right-sized. Find other ways to generate income, especially if you are a start-up.

Tags: Cash Flow, defensive strategies, smart cash management
Posted in Cash Flow, Recession Busters | No Comments »

Preventing loss from bankrupt customers

Wednesday, September 9th, 2009

It might start with late payments, or unreturned phone calls. It might be that you had no idea there was anything wrong and you get a notice in the mail. When a customer files for bankruptcy it could have a big ripple effect throughout your organization. Here are a few tips to prevent a loss for your company:

Analyze your risk: All eggs in one basket= trouble. We all have that one gem customer that buys a lot from us, and while this steady stream of income is good it can also spell disaster if the company goes under. Do a quick sales analysis to see what percentage of your sales comes from each customer. If someone represents more than 20% look to diversify your client base.

Be proactive: Periodic credit checks may help to identify problems. The $100-$200 you spend on a credit check through Experian or Dun & Bradstreet may be pennies compared to not collecting on some of your bills. Make sure that you monitor your Accounts Receivable Aging reports and you set limits on the amount of credit you extend to your customers.

Communicate, communicate, communicate. Before any negative information shows up on your customer’s credit report you may find that keeping in touch with your client can help you see red flags of problems before they become your problem. On the upside, you may provide a solution to keep them from going under, or at least you can take preventative measures like putting them on a cash-only basis to ensure that you are not at risk.

Don’t be afraid to cut them off. There, we said it. Yes, you will lose sales—you may even have to lay people off. A non-paying customer, no matter how big they are, is bad news. You didn’t get into business to run a charity and a non-paying customer is sapping you out of both cash and profit. Try to work with them but stand your ground.

Get creative. If you are owed a lot of money, you may need to think outside of typical 30-day payment terms. Installment plans make a debt easier to pay off, especially if a customer is struggling. Beware, though, since this opens you up to risk, and you should balance your cash needs with the risk of not getting paid the full balance. This may be your only option if the customer is on the brink of bankruptcy to recoup a piece of what you are owed.

Tags: defensive strategies, smart planning
Posted in Cash Flow, Recession Busters | No Comments »

Finding Funds in the Credit Crunch

Thursday, July 2nd, 2009

Will you have enough funds to take advantage of the economic upturn? Despite “green shoots” of economic recovery, one problem still persists for many small businesses: access to credit. For those businesses battered by the recession, cash can be hard to come by to fund day-to-day operations, let alone expansion. We’ve come up with a list of organizations who are lending, even in the downturn.

Banks & Credit Unions

Best for: businesses and individuals with excellent credit and collateral.
Rates: 5%-9%
Summary: You may be surprised that banks still do have money to lend, and they are eager to do so for people who qualify. The key is in having good credit and some collateral. Banks will lend owners up to 10% of sales before they look for collateral. If you want more than that, be prepared to put up your house or other asset as collateral. Before you waste your time filling out the long application only to find out you don’t qualify, put together an executive summary about your business, detailing your loan request. Be specific. Outline how much you need, what you need the money for, and what you are offering as collateral. If you are a majority owner of the business, you should include a personal financial statement that lays out what you own and what you owe since ultimately you will be guaranteeing the loan. Then go to the banks and pre-screen them to see if you would meet their standards.

SBA Loans

Best for: Businesses and individuals who are borderline qualifiers for traditional lines/loans
Rates: 5%-9%
Summary: If your bank isn’t comfortable underwriting your loan on its own, you may qualify for any one of the SBA programs. You still apply through your bank, and the SBA will back up to 90% of your loan. Don’t be wooed into thinking this is easy money. Most banks look at the SBA as an insurance policy, and the application process can be complicated. If there is a mistake made in the application process, and the loan goes south, the SBA could back out of its obligation. There are different loans and line of credit programs, including a new program to lend up to $35K to meet current debt obligations.

On Deck Capital

Best for: Retail shops with strong cash flow, in business for more than 1 year
Rates: 18%-36%
Summary: Unlike other lenders we feature here, On Deck Capital does not rely on the owner’s credit to make its decision. Instead, they look at the strength of the company’s cash flow. provides a quick infusion of cash into retail businesses that have strong cash flow. They extend loans up to $100,000 to retailers and arrange repayment by weekly draws from your checking account. This alternative may prove to be better than a credit card, but not by much given the steep rates. When you can’t qualify for traditional credit, OnDeck’s quick loan decisions and 7 day fund transfers may just be the cash boost you need to avoid a major crisis.

NJ Economic Development Authority

Best for: Businesses who have been established for at least 1-2 years, good credit
Rates: As low as 5% + application, closing, and commitment fees which can equal >2%
Summary: The NJ Economic Development Authority, like the SBA, has a number of programs available for small to mid-sized businesses. Some are direct loans from the EDA while others are guarantees to the banks to encourage lending. Loans can range from $25,000 to $2.5MM depending on what the money will be used for. There are special programs for job creation, capital investment, and urban development. Although the interest rates are low, the fees for these programs can make this an expensive option, depending on the size of the loan.

Peer-to-Peer Lending

Best for: Established businesses who need up to $25,000 and a quick decision
Rates: 7.5%-18%
Summary: Companies like Lending Club and Pertuity Direct offer unsecured loans for borrowers with a good credit history. Minimum credit scores that are required are about 660 and up. P2P might be an alternative if you are a credit-worthy borrower who needs a small amount of money and you don’t qualify for traditional loans. The loans are 3-year term loans, which makes monthly payment a bit easier to digest from a cash flow perspective.

Factoring:

Best for: Businesses with receivables from large companies.
Rates:2%- 30% (depending on length of time it takes for them to collect on invoice)
Summary: Factoring is when you sell your accounts receivables to another company called a factor in exchange for cash. The factor will pay you a portion of the invoice upfront and will take a percentage based on when the customer pays the invoice. Many factoring companies require that you sign a 6 month to 1 year contract and factor all invoices through them. This could mean that you can give 3% or more up on each invoice that gets processed through the factor. are not interests in one-off invoice factoring and some require that they receive a minimum percentage annually. This can be an unpredictable and costly way to get cash, however it could be a last resort. Beware, however, that factors take some time to set up because in essence, you are having all invoices sent to the factor and they become the payee and then forward you the cash. Factors will look at your customer’s creditworthiness in order to determine your fee structure. The longer the invoice is outstanding with the factor the less you collect in the end.

Non-profits:

Best for: Businesses who do not qualify for traditional loans
Rates: 2%-10%+
Summary: There are a number of non-profits that are lending to small businesses who do not qualify for traditional bank loans. Loans or lines of credit issued by these institutions range from $500- $50,000 and carry an interest rate up to 10%. The Greater Newark Business Development Consortium’s (GNBDC) focus is on financing small business growth and development, specifically those owned by minority, women and low-income entrepreneurs possessing the capability to operate successful business concerns. The Union County Economic Development Corporation (UCEDC) offers microloans up to $35K for startup financing and gap financing for existing businesses throughout New Jersey. Both organizations also offer valuable training classes for continued professional development of their leaders. Be prepared to provide a complete and compelling loan package to these organizations, including financial projections and a well-thought-out executive summary.

Tags: Cash Flow, loans
Posted in Cash Flow, Planning | No Comments »

Webinar: “Three #s That Drive Your Business”

Tuesday, June 23rd, 2009

If you want to use your numbers to help you manage your business but don’t have the time to pour over pages of reports to figure it which ones to use– this seminar is for you. We’ve come up with three simple numbers that drive every business’ money-making engine. These numbers are easy to find and will help you diagnose nearly all business trouble spots and head off problems before they start. The best part is you don’t have to be an accounting whiz to figure it all out. Click on our flyer for more information, and our money-back guarantee.

“The Three Numbers That Drive Your Business”

Thursday, July 9, 2009

12noon-1:30PM (Eastern)

Cost: $49.00

Location: Webinar

Click here to register

Posted in Business Model, Cash Flow, Cost Cutting, Planning, Pricing, Recession Busters | No Comments »

To find cash in your business- staple yourself to an order

Tuesday, March 31st, 2009

The first lesson that most start-ups learn is the difference between profit and cash flow. Even established businesses lose sight of cash flow when times are good, since high profits tend to generate sufficient cash. It takes tough times like these for businesses to take a good hard look at how cash is used and pumped into the business. We’ll look at how to get cash flow back on track, shaking your own money tree to find cash you already have in your business.

Cost cutting is a great way to free up cash, but it’s not the only way. If you really want to find money, you should look at the whole process from the time an order is taken to the time that cash is collected. This is called the order-to-cash (OTC) cycle.

Staple yourself to an order

When we work with clients we like to “staple” ourselves to an order to see how cash is flowing through the business. We find that when look at cash flow as a process, it makes it easier to see where cash is tied up in a business.

Below is a typical order-to-cash cycle. While this may look like it only applies to manufacturing businesses, service businesses follow along the same cycle. Their “Raw Materials” may take the form of training of employees, or pre-sale research, or hiring contractors to prepare system prototypes. Their “Build” process includes actual consulting work or services they provide. “Delivery” includes final reports, system implementations, etc.

We’ll take a look at each of these steps and give you a list of actions you can take to get your cash flowing again.

BUY RAW MATERIALS:

Reduce inventory quantities to the lowest level possible without sacrificing service.
Require a pre-payment or first installment to purchase materials or hire contractors.
Renegotiate vendor contracts for discounts, smaller minimum quantities and extended payment terms. Push payment terms out as far as possible, preferably after you get paid by your customer.
Evaluate current warehouse facility, is it being used to capacity? Consider downsizing space.

PROCESS ORDER:

Review how many people it takes to take an order or outline project specifications
If it is a time-intensive process to detail the order (as in service businesses), is there a way to shorten the cycle?
Run credit checks on customers for large orders, establish and monitor credit limits
Review order accuracy. Are proper purchase orders secured, quantities correct, and ship-to addresses verified? These can slow down the collection process in the end.

BUILD ITEM:

Reduce the amount of finished goods inventory you need to carry
Reduce production time, or implement more frequent installment billings as work progresses.
Pull out your P&L and look at overhead costs for areas to reduce. Focus on eliminating costs that do not have a direct impact on customer satisfaction or increasing sales.
Can part of the building process be outsourced to vendors who can produce the item more quickly and efficiently?
Take pre-paid items like insurance and modify contracts to be small monthly amounts vs. lump sums.
Review equipment you use to produce product/service. Leasing vs. buying will not tie up as much cash in assets.
Sell any unused equipment, review obsolete inventory and sell if possible.

DELIVER:

Ensure shipment accuracy which will cause payment delays or short-payments
Simplify delivery options (ship full pallets, or for services: deliver final product remotely)
Change shipping terms to FOB shipping point vs. FOB delivery, to issue bills sooner
Economize on delivery options, (i.e. train vs. truck, ground vs. air) to reduce costs
What are order fulfillment rates? Do out-of-stocks delay shipments and payments?

BILL CUSTOMER:

Increase frequency of billing (e.g. from monthly to weekly)
Shorten terms: instead of 30 day terms, reduce or make it “payment upon receipt.”
Offer 2% discount for prompt payment. (This may be far less costly than missed sales opportunities if you don’t have cash.)
Ensure billing accuracy: correct purchse order, address, and ensure the invoice and documentation comply with customer requirements
Establish and enforce late-payment penalties.
Use electronic billing vs. postal mail.

RECEIVE PAYMENT:

Follow up promptly on overdue invoices
Use credit cards or Paypal accounts as forms of payment (understanding that fees can be as high a 7% for doing so)
Consider factoring invoices if all else fails. This can be an expensive alternative but may be necessary to generate cash.

Tags: Cash Flow
Posted in Cash Flow, Cost Cutting | No Comments »

Shaking the money tree– finding cash in your business

Sunday, March 15th, 2009

When you are short of cash, do you immediately think of going to the bank for more money? With banks tightening standards these days it might be best to look inside your business for cash that is tied up in day to day operations.

Remember the saying money doesn’t grow on trees? Well, let’s pretend for now that it does.

If you wanted to shake some of the leaves off the tree, would you try to shake the trunk? No, you’d go branch by branch and give each a good shake. Lo and behold, leaves start falling to the ground.

The trunk-shaking approach is what a lot of business owners take when it comes to cash flow. They push hard at the trunk, and then give up, thinking they need to go to outside sources to find funding. Yet, a resourceful individual knows by climbing the tree, and going branch by branch they’re bound to find money right there in the business.

The benefit of shaking the branches is that you flush out a lot of cash that was just “hanging” out there. Whether it is finding new ways to improve sales, collecting faster on your receivables, reducing inventory or lowering costs, you can shake your money tree and find cash that you didn’t think you had.

Posted in Cash Flow | No Comments »

Where did all my money go? Having a cash plan

Thursday, January 29th, 2009

The single most important financial step that business owners must take in 2009 is having a cash plan, also known as a cash flow forecast.

Why should you go the extra step and forecast your bank balance?

One word– LIQUIDITY.

Never in recent history has cash been so tight for businesses. Between late-paying customers, banks who are reluctant to lend, and falling equity values in homes on which many business owners relied as their emergency reserve, finding and keeping cash is getting harder to do. Liquidity will be the defining factor in the survival of many businesses this year.

While we’re talking doom and gloom—it doesn’t look like it will be getting better any time soon. Economists claim the downturn could last through the end of next year. Ouch.

Convinced you need a cash flow forecast? Good. Here’s a very simplified version of how to calculate one:

Start with your beginning cash balance for the year

+ Net income forecast

- Bad debt, or late-paying customers

+ Any expenses you put off paying

- Any other cash payments to pay down loans, credit card balances, etc

- Equity draws

= Ending cash balance

While this is a rough estimate of your cash balance, if your break it down by month you’ll be able to see when and if you will run out of cash. Then you can plan on how you will cover the shortfall.

This is the survival mode of cash flow forecasting, but there is an upside too. Say you plan to expand your business in the coming years. Having a cash flow plan will allow you to see if you will have enough money to fund a new employee, buy a piece of equipment or acquire a competitor– without relying on a line of credit or business loan.

Posted in Cash Flow, Forecasting, Planning | No Comments »

Categories

Archives