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Financial Fitness: Business Cash Management Essentials

Many aspiring entrepreneurs go into business because they have a product or a service they feel strongly they can offer that will in some way be better than what is currently available to their potential customers. Either they will have more reasonable pricing, personalized customer service, a higher quality product, more convenient hours, highly effective marketing or some other "edge” over the competition. And in many cases, the entrepreneurs are correct and their fledgling business grows as sales increase. This would seem to be great news and promise success to the small business, but unfortunately there is more to staying in business than just providing a quality product or service. Cash management is the absolute key to the short and long-term success of any business venture, be it a one-man operation or an international corporation employing thousands.
 
The trap entrepreneurs often fall into is thinking that expertise in their chosen field and a decent sales volume are enough, and that cash flow will be there as long as they are busy. A majority of failed businesses can point to mismanaged finances as the primary reason for their demise, even in cases where sales are booming. So why is it that a business making sales and keeping busy is at risk of failure, and what can a business owner do to minimize their risk even when finances and accounting are not their forte?
 
First, let’s understand the basic problem. Sales are absolutely essential to maintaining a successful business. But why aren’t they "enough”? There are several factors that weigh in:
  • Inventory – some businesses require large outlays of cash to purchase inventory, which may or may not be sold quickly, tying up large quantities of cash that sit on the shelf or warehouse floor and gather dust.
  • Receivables & Payables – if credit customers take longer to pay than the business takes to pay its outstanding bills, a cash shortage could become a real problem; a balance between receivables and payables scheduling is essential to proper cash management.
  • Capital Expenditures – large outlays of cash for assets such as equipment, vehicles, real estate or technology can be important for business growth, but pose a cash flow problem if they are not managed properly.
  • Pricing – goods and services need to be priced so that not only the cost of the sale is considered, but the business overhead is also taken care of and a profit margin is included. No business can be maintained by losing even small amounts of money on every sale; a business that has to cut prices that far is doomed to failure.
  • Sales Cycles – some businesses are cyclical or seasonal, or they ebb and flow based upon factors outside their direct control. Assuming the sales and receivables will always "be there” during the lean times is a huge mistake that can have dire consequences; business owners need to maintain a cash buffer to see them through lean times; whether those downturns are planned or unexpected.
So how can a business owner minimize their exposure to cash shortages? Following are some general guidelines for keeping track of your cash and protecting your business.
  • Plan your cash flow at least 6 months in advance to make sure you have the cash to meet your business needs, including payroll, estimated tax payments and general operating expenses.
  • Use your bank balance as a tool in planning, but don’t mistakenly think of it as actual, usable cash. "I must have money, I haven’t run out of checks yet” isn’t a good strategy for cash management. Always remember that your bank balance fluctuates dramatically as bills are paid, assets are purchased and invoices are collected.
  • Think about your business and try to establish a few signals of the ebb and flow of sales. Depending upon what business you are in, it could be the size of your phone bill that lets you gage how sales are going, or it could be the number of packages out the door each day, or the mileage driven by your delivery trucks. Obviously this is different for each individual business but knowing what the signals are without having to analyze a monthly or quarterly financial statement every day could be a good tool for being proactive and avoiding cash crunches instead of having to react to crisis situations.
Your banker may be able to provide assistance in the form of tools you can use to keep on top of your cash management situation. Some cash flow management products and services offered by many banks that can be helpful include:
  • Sweep accounts - these can be used to provide overdraft protection and can be set-up to leave only enough cash in your checking account to handle the needed outlays for the day; your remaining balance can be moved into investment accounts so the money remaining in your account is making money for you.
  • Credit lines can be used in cases where you need a quick cash outlay but know you will have the cash to cover the expenditure shortly. Banks appreciate advance planning, and will be more likely to set up a credit line for your business or offer a loan if you have a clear plan for where the money is going and how it will be recouped.
  • Electronic payment tools such as ACH direct debits, wire transfers and remote deposit capture help you ensure that payments from your customers are in your account as quickly as possible, while you can better manage and schedule payments to your suppliers.
The best business cash management tool you can employ is information. Know when you need to spend cash and how much you need to spend. Know how much your customers owe and when it is due. Keep on top of overdue payments and do not let slow-paying customers continue to obtain goods and services on credit. Be aware, and don’t get caught with bills to pay and no cash with which to pay them! Cash flow isn’t a boring accounting function. It is the lifeblood of your venture. Give it the required attention.
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