Managing Cash In Your Business – by Eric Brown

Sometimes business owners feel that if their company is profitable, all is well. Such an attitude may lead to a false sense of confidence, however, when the dynamic relationship between cash flow and profitability is misunderstood. Which is ultimately more important to the ongoing success and survival of a small business? Of course, profitability and cash flow are interdependent, so it is essential that business owners not get so focused on the profits that they neglect cash flow management.

In our current economy, even a profitable business could quickly find itself lacking cash on hand for necessary expenses. Imagine your business facing this scenario: Your customers have decided to renegotiate their payment terms and expect 45 days or more to pay on current invoices. At the same time, your vendors are now demanding you pay them on shorter payment terms. You pay employees bi-weekly, and it just happens to be one of those few months in the year during which there are three payroll cycles. In such challenging circumstances, a business owner that hasn’t properly managed cash flow may find it necessary to borrow money just to get through the month.

Owning a business myself, I have had to grapple with cash flow management decisions while striving to run a profitable company. To gain some insight into successfully navigating this tricky terrain, I spent time discussing these issues with some local CPAs and a commercial banker.

Joe Witt, Executive Vice President of Corporate Banking at Old Point National Bank, who is also a CPA with an MBA, has a unique perspective on this topic. Witt states simply, “Cash is king, and as we hit hard times, it becomes more relevant. Understanding how cash flows and turns in a company is critical.” He suggests using some metric tools such as “Days to Cash” to measure this activity. This approach examines three specific things on a balance sheet: receivables, payables, and inventory (if your business has this). Successful management of these areas of your business will reduce the need for working capital.

Witt offers the following suggestions:
• Speed up your billing process—invoice weekly
• Utilize remote deposit capture—scan checks and deposits from your own office
• Offer payment options via ACH or credit card
• Manage inventory efficiently—have less on hand for slower-moving items
• Get better payment terms with vendors—longer terms when possible

“Often business people are interested in the sale, but do not manage the process to collect it,” according to Witt. “There have been more businesses to go under because of lack of cash versus a lack of profit.”

Jeff Karr, CPA with Goodman & Company, describes profitability as the foundation of your cash flow, but he emphasizes that how cash is used is most important. Business owners must be strategic about how they reinvest cash in their businesses. Karr understands that some owners do not like to have debt and have decided to pay for new equipment (for long-term use) with cash, but such a company may be highly profitable, yet have no cash. Then comes time to pay taxes, but there is no cash to pay for them, which further compounds the problem.

To avoid finding your business in this situation, Karr suggests using financing to secure long-term assets instead. Karr asserts, “If business owners borrow the money for long term assets, their return on that investment is bigger than the interest expense they are paying because they can’t grow without that piece of equipment.”

Some recommendations from Jeff:
• Get discounts from vendors for early or prepayment
• Utilize sweep accounts when viable
• Know your customers’ ability to pay—if you have think twice whether to do business with them, don’t!
• Avoid taking work at or below cost just to keep your people busy.

Patrick Shuler, CPA with Goodman & Company, believes that if a business owner uses of a line of credit, it should be utilized for short-term cash needs and not long-term assets. Take a pulse of your business by matching up your assets to liabilities. Shuler asserts that your receivables, inventory, and cash on hand (current assets) should always be higher than your current payables and line of credit. Failure to keep these areas in the appropriate balance could result in a weaker financial position overall. “You don’t want to get flip-flopped where you are owing more than you’re generating,” Shuler says. A business may be profitable yet faced with trying to reduce debt from previous years’ activities, resulting in even more adverse consequences for tax planning and debt reduction strategies.

Another interesting perspective Shuler offers pertains to the cost of bringing in new business. He explains, “With new clients, you typically don’t have as high return on your investment as compared to your long-term clients because it takes time to recoup startup costs for new ones,” says Shuler. Businesses need new clients, but when working with mid- and long-term clients, you clearly must understand their pay cycles and what it really costs to handle their work.

Shuler’s recommendations on managing your business:
• Perform credit checks on potential clients
• Request advance or short payment terms for new business
• Focus on growing your business by developing the relationships you already have and   creating long-term client relationships

I believe it’s important to regularly evaluate the financial health of my business, and I have learned over the years that neither profitability nor cash flow alone is an effective measure. Instead, business owners must consider both of these factors as they relate to one another and use the information gathered to make judicious cash flow management choices.

Joe Witt may be contacted at [email protected]

Jeff Karr is at [email protected]

Patrick Shuler is at [email protected]

ERIC BROWN, CEO of Mobile One Courier & Logistics, started his company 14 years ago as a same day courier service. Today in Hampton Roads, Mobile One has a staff of over 60 people. Diversified in providing total logistics solutions for businesses, Eric’s company specializes in providing distribution, warehousing, and fulfillment solutions. Eric hopes to help businesses grow more efficiently by leveraging their time through outsourcing. This can ultimately help companies to grow their top line and focus on their core business rather than their “backroom.”

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