Want More Cash Flow? Check your Accounts Payable Cycle

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Understanding the levers that drive your company’s cash flow can be the difference between staying in the game or closing up shop. A business can have positive net income, but still come up short of the cash it needs to keep the doors open.

One of those metrics that can cause a lack of cash is your accounts payable collection cycle. It’s one of the four key pillars that drive cash flow.

Accounts Payable Cycle

Some company’s vendors offer the ability to buy their products or services and pay them later. Offering this credit is like getting a short-term interest free loan from the vendor. As part of the deal, your vendor will want to get paid back based on the payment terms they offered. Understanding how long it takes for you to pay vendors is critical to your cash flow.

How do you measure it? Below is a formula that calculates your accounts payable days to pay cycle. Like the accounts receivable collection cycle, this calculation is based on a “snapshot in time” and you will want to monitor it on a regular basis such as monthly.

Formula:

Total expenses / 365 days= daily expenses
Accounts Payable / daily expenses= days to pay cycle

Example:
$900,000 / 365 days= $2,465 daily expenses
$50,000 / $2,465= 20 days to pay cycle

In the above example it takes approximately 20 days for the company to pay its expenses. Some expenses are probably paid upon receipt and other expenses may offer up to 30 days or more to pay. If this metric could be stretched from 20 days to 30 days the company would retain approximately $24,000 in its bank account. This could give it more time to collect accounts receivable from its customers and allow it the cushion it needs to pay bills on time and feel comfortable meeting its obligations.

How could it stretch the days without upsetting its vendors? A couple of strategies:

  • Ask vendors for longer payment terms
  • Use a company credit card to “time” the payment to a vendor. Most credit card providers give you up to 30 days after your statement ending date to pay the outstanding balance. Depending on the timing of your payment, this can add up to 30 to 45 days more time to pay.

Know your accounts payable payment cycle. Monitor it on a regular basis and look at strategies to extend it while working with your vendors to pay within the agreed-upon time. The right accounts payable payment cycle could be the difference between positive or negative cash flow!

Cash Flow Tips For Uncertain Times

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I’ve been watching the news and talking with colleagues and clients and wanted to share some strategies with you that may come in handy as you navigate through uncertain times.

Consider these cash preservation ideas…

  • Research refinance options for any high interest loans and ask for some or all of the closing costs to be waived.
  • The Small Business Administration has created a program to fast track low interest loans under its Economic Injury Disaster Loan, visit: www.sba.gov/disaster
  • Reach out to your lenders about deferring payments, or reducing to interest only payments, on debt.
  • Ask your landlord if you can pay rent at the end of the month (in arrears) for the next 90 days.
  • Ask your landlord about reducing or deferring Common Area Maintenance (CAM) charges for the next 90 days.
  • Call clients to see who can pay faster/earlier.
  • Call vendors to see if you can get extended terms or defer some portion of invoices to a later date.
  • Ask vendors to take payment on a company credit card.  Ask the vendor to charge the amount just after the credit card statement drop date.  This can defer a payment from 15-45 days if timed correctly.
  • Reach out to your credit card company to ask for reduced or zero interest for the next 90-120 days.
  • Bill customers as quickly as possible.
  • Consider whether you have any customers who might pay now for future delivery of services.
  • Defer your personal tax return filing and payment to July 15th.  The IRS issued recent ruling that is allowing a delayed 2019 tax filing until this date.  However, if you are owed a refund file your return now to get the funds.

If you think of other ideas, I’d love to hear them!  My belief is that we will come out of this stronger and definitely together when times are tough.  Stay well and here’s to more cash flow coming into your company!

Mike

Want More Cash Flow? Check your Accounts Receivable Cycle

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I sometimes hear from business owners that they are making a profit, but they don’t seem to have positive cash flow at the end of the year. What happened?

Your business may generate a positive net income, but if you aren’t monitoring other key cash flow drivers, then you can find yourself strapped for cash to meet the obligations of the business.

One of those drivers that can cause a lack of cash is your Accounts Receivable (A/R) collection cycle. It’s one of the four pillars that drive cash flow (along with Accounts Payable, EBITDA, and Inventory Days-on-Hand)

Your Accounts Receivable Cycle

Many businesses offer customers the ability to “Buy Now, Pay Later” for their purchases. In other words, they are providing customers a short-term interest free loan to pay for the product or service! If your customer doesn’t pay on time or takes longer than you expect, it can create a cash flow problem in your business.

Monitoring how long it takes for you to collect your accounts receivable is important. The quicker you can collect it, the quicker you get the cash you need to pay your bills and reinvest for your company’s growth.

But how do you measure it? Below is a formula to determine your collection cycle. Keep in mind your cycle will shift weekly, monthly, quarterly, etc… The calculation is merely a “snapshot in time,” but it’s important to know.

Formula:
Annual sales / 365 days= daily sales
Accounts receivable balance / daily sales= days to collect accounts receivable

Example:
$1,000,000 / 365 days= $2,740 daily sales
Accounts receivable $80,000 / $2,740= 29 days

In the above example, it takes on average about 30 days to collect the amounts owed by the company’s customers. If this metric increases from 29 days to 39 days, then the extra 10 days has left the company with $27,400 less cash in their bank account than if they had collected it in 30 days. This is where the business owner could see a positive net profit in the profit and loss statement, but also see that their cash balance has decreased by $27,400.

Know your accounts receivable collection cycle. Calculate it on a regular basis, such as monthly. Identify customers who are consistently not paying on time and determine a strategy to encourage them to pay within the terms you have offered. It can be the difference between positive or negative cash flow!

For more resources to help you measure this important metric, check out our Numbers Coach tools and templates.

Preserving Cash In Uncertain Times

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I’ve been watching the news and talking with colleagues and clients and wanted to share some strategies with you for preserving cash that may come in handy.

1. Research refinance options for any high interest loans and ask for some or all of the closing costs to be waived.
2. The Small Business Administration has created a program to fast track low interest loans under its Economic Injury Disaster Loan, visit: www.sba.gov/disaster
3. Reach out to your lenders about deferring payments, or reducing to interest only payments, on debt.
4. Ask your landlord if you can pay rent at the end of the month (in arrears) for the next 90 days.
5. Ask your landlord about reducing or deferring Common Area Maintenance (CAM) charges for the next 90 days.
6. Call clients to see who can pay faster/earlier.
7. Call vendors to see if you can get extended terms or defer some portion of invoices to a later date. 8. Ask vendors to take payment on a company credit card.  Ask the vendor to charge the amount just after the credit card statement drop date.  This can defer a payment from 15-45 days if timed correctly.
9. Reach out to your credit card company to ask for reduced or zero interest for the next 90-120 days. 10. Bill customers as quickly as possible.
11. Consider whether you have any customers who might pay now for future delivery of services.
12. Defer your personal tax return filing and payment to July 15th.  The IRS issued a recent ruling that is allowing a delayed 2019 tax filing until this date.  However, if you are owed a refund, file your return now to get the funds.

Congress is in the process of an enacting special legislation called the “CARES Act” which is in the Senate at this time.

If you think of other ideas, I’d love to hear them!  My belief is that we will come out of this stronger and definitely together.  Scientists around the world will find the path through for our collective well-being.

Stay well!  And if you have any questions, concerns or just want someone to talk through your ideas, don’t hesitate to reach out.    Mike

Reassess Your Customer Credit Practices for Stronger Financials

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by Anne Moore Odell

Every time you send out an invoice, it is like you are granting a loan to your clients. Business is built on trust with products and services moving around the world on the foundation that invoices are going to be paid in a timely manner.

However, extending credit can’t happen in a vacuum. It is up to you to create credit policies that keep your cash flow and business healthy. And while having good credit practices in place is always important, it is especially important to make wise credit decisions in today’s difficult economic times.

Here are 5 tips to help you create sound credit policies:

 1. Take the Time to Research

Now is the time to revisit your credit application process. Make sure that your application is thorough. Make the effort to call all supplied references and banks. Although clients are only going to supply positive references, you can still learn a lot about how potential clients work.

Do your homework on prospects by going to the library where free information from publicly traded companies can be found. Consider using a professional credit report service like Dun & Bradstreet , TransUnion or Equifax. For a small fee they can provide credit histories, records of liens against companies, and current financial obligations on larger clients.

“Don’t forget to use your contacts with the various business associations you belong to – they can help gain information about credit decisions,” suggests Mike Iverson, CEO of Trillium Financial. “Through these relationships and through relationships with other vendors, you can learn about potential clients. You might also require information from clients’ accountants, and tax returns,” says Iverson.

2. Consider using a Z-Score 

A Z-Score is a calculation that allows you to figure out the financial health of a company by using ratio values for a “score” that can indicate potential future bankruptcy. A Z-Score calculator can be located at either The Accounts Receivable Network (membership site: www.tarn.com) or at JaxWorks (http://www.jaxworks.com/calc2a.htm )

3. Be Selective

Keep your customers’ credit files up to date. With businesses going bankrupt and changing hands, it is important to update your credit information on existing clients, increasing or decreasing credit limits as needed.
“In this market you need to be discerning regarding who you are offering your services and products to,” says Marc D. Smith, Vice President, Magnolia Financial, Inc, based in Spartanburg, SC. “Fire customers if they don’t meet your credit requirements.”

Because of the reduction in sales that many businesses are seeing across sectors and industries, businesses are facing increased pressures when it comes to extending credit. However, just because a client is interested in your product or service it doesn’t mean that you need to accept every application.

“In my experience, people are lowering some of their credit limits,” says Iverson. “You should consider your accounts receivables to be much like an investment portfolio—you have invested in your customers and you want your portfolio to be profitable.”

Working with customers before problems and outstanding invoices occur is the best approach. In some cases, you can work out new payment schedules. It is also important to include your entire team so that salespeople know clients’ credit and payment histories.

4. Follow Up

“In good or bad times, one of the keys to collecting from customers is timely and accurate billing,” explains Mike Iverson, CEO of Trillium Financial. “That sounds like a no brainer, but sometimes that doesn’t happen. An invoice might have to be approved or reviewed by several different people, which can cause you to lose two, three, or four days in collecting your invoice.”

One effective practice for larger bills is calling to follow up on an invoice two or three days after it is sent to see if everything is in order. This practice not only puts you top of mind with your client but acts as a customer service call that could generate more sales. If the client does have an issue with the bill, then you can quickly solve the problem, generate another invoice and get paid on time.
Another proactive practice is to send monthly statements or even bi-weekly statements, again reminding clients before bills become overdue.

5. Good Relationships are Important

All levels of management are becoming more involved in credit decisions as businesses look to keep the cash coming in. These days CFOs and CEOs are participating in credit decisions with their teams.

One of the main points to remember, however, is that while economic downturns will end, the relationships you form today will continue. Working to preserve the business relationships you have now and creating new working relationships not only generates good will, but also builds a strong foundation to catapult your business when the economy rebounds.

Your Best Tool for Understanding Short-Term Cash Flow

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In a recent article, I shared ideas on how to positively position your company’s financials, even during a slowing economy.  The key is to ensure you have strong cash stores and credit availability.

Today, I will explain a management tool that helps you anticipate your near-future cash flow and identify any areas of weakness: Presenting the 13-Week Cash Flow Analysis. 

You may already use software that allows you to run regular cash flow analyses. These give a more accurate picture than net profit or bank statements.

Initiate your 13-week cash flow analysis by gathering the data needed to build an accurate report:

  • Current bank account and credit card balances
  • Upcoming mortgage or lease payments
  • Estimated cash receipts
  • Estimated payroll and taxes
  • Estimated operating expenses
  • Any other upcoming transactions that will impact cash flow.

The integrity of the report is dependent on the accuracy of the data as well as it being correctly entered or integrated into a spreadsheet or software. For the variable revenue and expenses you estimate, be sure to keep seasonal influences in mind. And remember, you only need to record and predict 13 weeks out – it’s a short-term tool.

A report with solid data and estimates is a good indication of your cash situation over the next 3 months (or, one full quarter). But check the output against your gut:  If the balance seems overly positive in any or all of the 13 weeks, review your estimates, especially sales and accounts receivable forecasts. Being overly optimistic won’t serve you well – if anything, conservative estimates will give you the padding needed to accommodate unpredictable changes.  If you have the time, run worst-, best- and average-case scenarios.

If the report indicates that your company will be cash poor at points during the next 13 weeks, it’s time to review your options:

  • Do you have unneeded equipment or inventory that can be sold to improve fluidity?
  • Are there expenses that can be eliminated, contracts that can be renegotiated or even dissolved, or payments negotiated or delayed?
  • Is it time to implement a collections push?
  • Is your billing and collections process quick and accurate?
  • Are there any loans available to the business?

Once it is set up, maintaining cash flow history and projections is easy. Monitor and update the report weekly, and review your historical projections against actuals to improve your modeling accuracy.

Cash and cash flow are critical to successful operations, and utilizing 13-week cash flow analyses will help you identify gaps and become better at anticipating your future cash needs to keep your business steady. So make proactive cash flow analysis one part of your flexible, resilient business, whether the economy and your customer demand are swinging up, down, or somewhere in between.

Preserving Cash in Uncertain Times

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I’ve been watching the news and talking with colleagues and clients and wanted to share some strategies with you for preserving cash in the short term that may come in handy in the long term. Here are 12 strategies I recommend:

  1. Research refinance options for any high interest loans and ask for some or all of the closing costs to be waived.
  2. The Small Business Administration has created a program to fast track low interest loans under its Economic Injury Disaster Loan, visit: www.sba.gov/disaster
  3. Reach out to your lenders about deferring payments, or reducing to interest only payments, on debt.
  4. Ask your landlord if you can pay rent at the end of the month (in arrears) for the next 90 days.
  5. Ask your landlord about reducing or deferring Common Area Maintenance (CAM) charges for the next 90 days.
  6. Call clients to see who can pay faster/earlier.
  7. Call vendors to see if you can get extended terms or defer some portion of invoices to a later date.
  8. Ask vendors to take payment on a company credit card. Ask the vendor to charge the amount just after the credit card statement drop date. This can defer a payment from 15-45 days if timed correctly.
  9. Reach out to your credit card company to ask for reduced or zero interest for the next 90-120 days.
  10. Bill customers as quickly as possible.
  11. Consider whether you have any customers who might pay now for future delivery of services.
  12. Defer your personal tax return filing and payment to July 15th. The IRS issued a recent ruling that is allowing a delayed 2019 tax filing until this date. However, if you are owed a refund, file your return now to get the funds.

Congress is in the process of an enacting special legislation to provide relief for businesses and individuals called the “CARES Act” which is in the Senate at this time. Click on this link for a summary of some items in the Act.

If you think of other ideas, I’d love to hear them! My belief is that we will come out of this stronger and definitely together. Scientists around the world will find the path through for our collective well-being.

Stay well! And if you have any questions, concerns or just want someone to talk through your ideas, don’t hesitate to reach out.

Solving Your Liquidity Crunch

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Sometimes business owners get into difficult situations because they don’t understand the likelihood of crisis and are unprepared when it strikes. One of the most likely kinds of crisis is a liquidity crunch.
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A liquidity crunch can occur as a result of a customer extending their time to pay you. This event may come unplanned, and therefore, put you in a cash crunch in the short-term. As the saying goes “cash is king.”
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Sometimes a liquidity crunch is the result of a business decision that doesn’t work according to plan. A business invests in a new product or service line, only to learn that market demand for the new offering is less than expected and the business needs some time to adjust. The money expended may eventually be recouped, but the payback period will be significantly longer than management had planned.
Lining Up a Credit Line
One way to prepare for a liquidity event described above is to line up a source of available cash while the business is flourishing. The best time to get a loan is when you don’t need it. However, in my experience, some business owners delay this process during good times because they are too busy to plan for lean times, then panick when trouble hits. The panic sometimes causes them to drain their personal bank accounts. This is a mistake that must be avoided. Nothing is worse than letting a business difficulty spill into the business owner’s personal life.
A far better option is to pursue a business line of credit, which is an agreement for a lender to provide a specified amount of short-term credit to a business owner for a period of one year or less. The maximum amount of the credit line typically depends on business revenues, the credit history of the business or its owner, their industry, and how long the business has been in operation.
The best thing about a line of credit is the flexibility it offers. I recommend using a line of credit prudently. You should not use it to shore up operating issues that are not getting addressed. It should be for a short period of time with a clear indication on how it gets paid back. You only borrow what you need, when you need it, and you are borrowing only for a short-term time horizon, less than 12 months. If you don’t see how you will be able to pay off the line of credit within the 12 months then it should not be used. Rather you should seek more long-term financing with your bank or other institution.
Where You Borrow and What You Pay
In years past, banks provided virtually all lines of credit. The documentation could be significant, but if you were approved the rate was usually very good. The interest rate charged on a credit line was generally stated as a standard rate like bank prime, plus a small spread for the lender.
Today, the process has changed some given new financial regulations. Many banks may not lend to a small business, unless the owner or business is a long-time customer with other banking needs (checking, savings…). But, it’s well worth asking banks if a business line of credit is available because of the competitiveness of their rates.
A whole new crop of online lenders has emerged to meet the needs of small businesses, including leaders like Kabbage, BlueVine and OnDeck. These lenders usually work with businesses seeking $10,000 – $200,000 as a line of credit. Rates are typically higher than those available from a bank. The range of APRs can easily exceed 18%. If you go down this path, find the right lender that is affordable for you. Be very careful taking on debt that is only “kicking the can down the road” and will ultimately result in a severely limited business operation.
Think of a line of credit as an insurance policy. You hope that tapping it won’t be necessary. But, when you face a liquidity crunch, you’ll be glad to have it. Remember, liquidity is a lifeline that might well save your business.
Have you considered a line of credit for your business? Call Trillium Financial. We can help you avoid the hazards and find the lender that best meets your needs.

Numbers Navigator Helps Pool Company Float More Cash to the Bottom Line

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About the Company

Bill White built Southern Splash Pools (“SSP”) in 2001 to provide northern Georgia with quality custom and new pool construction, pool repair and maintenance services.  SSP provides a lifetime structural guarantee with all of its installations.

The Situation

Over the years, Bill realized that his profits weren’t where he thought they should be, but couldn’t identify exactly why:  “At the end of the day, our overall sales numbers were good, but the bottom line was not.”

The Solution

Intrigued by information about the Numbers NavigatorR he found in the Numbers Coach (“NC”) monthly newsletter, White decided to “pull the trigger” and contacted NC’s, Mike Iverson, to provide a comprehensive analysis of SSP’s financial operations.  Iverson used the Numbers NavigatorR to determine the key financial drivers in SSP’s business model, then conducted a discovery session with management to gain an understanding of their key business issues.

NC provided SSP with a comprehensive financial report that identified opportunities to drive more cash flow from the business.  Together the Numbers Coach and SSP determined that margins were too thin, and that pricing per project needed to be adjusted to reach the profitability desired by SSP.  To achieve this the Numbers Coach provided:

  •  A 20+ page financial report detailing key drivers in SSP’s business model
  • Cash on hand/revenue targets for each month
  • Models for various pricing strategies and guidance on creating the pricing structure that would provide more profitability
  • Provided a short-term planning tool to ensure resources and cash were allocated appropriately
  • Established a schedule for accountability check-ins to measure progress on financial goals


“I appreciate Mike’s approach, which is educational and ‘real world;’ he boils it down to
what I really need to know to run my business. The best part is that I now understand
what the numbers are telling me and I have someone besides myself to hold me
accountable for reaching my financial goals.”


Bill White, President, Southern Splash Pools

Cash Flow Management: Now More Important Than Ever

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From “Mom&Pop” companies to major corporations, businesses today are looking at every penny flowing in and out.  No one relishes turning up the heat on clients to pay invoices faster. That’s why you should implement proactive cash flow management practices—before your bills start to pile up and your lines of credit are tapped out.

Conduct a Cash Flow Analysis

Cash flow controls the extent to which a business builds or consumes available cash and credit capacity.  Cash flow analysis is not simply an interesting management tool. It is necessary for the good health and future of every enterprise.

“At the end of the day, well-run businesses will use cash flow analysis as a tool to manage their destiny by preparing for future needs,” says Joe Dresnok, President of Management Horizons in Roswell, GA.  “For those companies that have the wisdom to keep either cash or credit resources available beyond the resources that they currently anticipate, those firms will likely have the ‘staying power’ to withstand the machinations of this turbulent economy.”

Your business software may already have built-in features that allow you to run regular cash flow analyses.  These analyses give a larger and more accurate picture than net profit or bank statements.

Use Cash Flow Forecasting

Run several different cash flows forecasts for your business: a best-case scenario, a worst-case scenario, and a middle case scenario.

“When thinking about cash flow management, a thirteen week rolling forecast is a very useful tool,” says Mike Iverson, CEO of Trillium Financial. “Today is the first week of the 13-week cycle. Use this tool to think about where you will be in three months.”

While economic turbulence does make it more difficult to predict exactly what your business will look like in three months, running these forecasts tells you if you will be able to pay bills, and help you create plans to be proactive in managing your cash flow requirements.

If you feel overwhelmed by a thirteen week period, then Iverson suggests “running a shorter one, for example an eight week cash flow forecast.”

“Cash flow projections is a valuable tool,” explains Dresnok. “It can mean the difference between success and failure – even for a growing business.  In short, cash flow projection can guide the business owner to controlled, profitable growth.”

Extend Credit Carefully and Invoice ASAP

“In light of the recent slow-down in the economy, many companies are experiencing declining revenues, slower collections of outstanding accounts receivable – or even write-offs– and less access to bank financing,” says Kent Bridges, CPA, Managing Partner of Bridges & Dunn-Rankin, LLP, headquarters in Atlanta, GA.  “Accordingly, businesses are having to be more proactive in their billing and collection practices including doing more to determine the credit worthiness of customers before extending them credit.”

Two of the best cash flow management techniques are (1) having policies in place on extending credit to customers and (2) having good billing practices.

Iverson suggests one tool to consider as part of your credit evaluation process is the Z-Score.  It is one of several tools that you can use to assist with the dilemma of who you should or should not extend credit. The Z–Score is a mathematical calculation used to rate companies’ creditworthiness.  You can find additional information about this methodology at the following resources:
•    The Accounts Receivable Network (www.tarn.com)
•    Credit Guru.com (www.creditguru.com)

In a cash-tight economy, fast and accurate invoicing is especially important as a good billing practice. Send your invoices as soon as possible. Don’t wait to send them out at the end of the month.

Make sure all the info on the invoice is accurate so that you don’t need to reissue a bill. One of the biggest issues for small and medium sized businesses for positive cash flow management is closing on the cash conversion cycle.  The conversion is the time between when a service or product is delivered until payment is received.

Cash in Hand

Other cash flow management tools include appropriate use of debt financing and maintaining sufficient cash reserves.

“While it varies according to the business, we generally recommend having cash in operating accounts equal to at least one to two months of operating expenses, having another one to two months of operating expenses covered by accounts receivable or recurring revenue, and another one to two months of operating expenses covered by available lines of credit” suggest Bridges.  “This provides the company with a minimum of three to six months of cash flow cushion in the event of a slow-down in revenue or collections. “

Remember: even fast-growing companies can have cash flow issues as they add new employees and equipment, making cash flow management important for all businesses in both good and tough economic environments.

Could Cash Flow Be the Problem?

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by Collette Parker

Did you know that almost half of businesses have their best-ever year right before they file for bankruptcy? They grow right out of business, and usually it’s not because of lack of sales – it’s poor management of cash.

“They may have had their best year on paper, but when you look at cash flow and working capital’ it’s going south real fast,” says Mike Iverson, CPA, and CEO of Trillium Financial.

The old adage is true: you can’t manage what you don’t measure. And even if sales are good, if you have vendors and employees asking for money, and customers who don’t have to pay for another 45 days – it’s a perfect storm for a cash crisis.

“Take the time to do a financial business plan every year,” Iverson says. Not 30 pages, but a simple two-pager with a financial forecast and a budget for 12 months. “That will give small businesses a leg up from those businesses who don’t write this out.”

Visuals help. It’s not enough to just go through a plan in your head. The process of examining your business closely enough to work out a model and a 12 month plan helps you to understand the flow of your business, including issues of seasonality. If you plan cash flow properly you can figure out how much money you can have in hand when you go into manufacturing season, and how much you’ll make in the selling season. “You can’t just set a $12 million goal, and divide the revenue figures by 12 for the year,” says Iverson.

One financial management tool that is useful in managing cash is a 12-month trailing budget. Once January closes, look at the last 12 months (including January) and chart the revenue. Then look at December and the 12 months prior. Are the numbers higher or lower? Look at the graph. Is it flattening out? Going down? “Graphing a trailing 12 month budget is a simple visual tool,” says Iverson, “and can be used for both sales and expenses.”

“If your management team sees a graph instead of a bunch of numbers, they can understand the concept. Hopefully you’re spotting a positive trend. Either way, you can understand what your cash trends are, and then have a budget that is detailed enough to effectively plan for the year.”

When planning the budget for healthy cash flow, be mindful of how much is invested in your working capital, and keep track of three key areas:

1. Accounts Receivables – Unless you are a cash business, chances are you extend credit to your customers. If your terms are 30 days, your customers should pay you within 30 days, not longer. If you begin to see a trend where customers are waiting 45–60 days to pay, you will probably begin to see cash flow problems. Don’t be a free bank for your customers.

Look at ways to reduce the time it takes customers to pay you: ask for advances from customers, or a down payment, installment, or some level of prepaid portion of the sale. If you’re in the situation where you really need the cash now, you can work with a factoring firm for receivables, or the bank for a loan.

2. Accounts Payable – Have favorable credit terms and solid partnerships with your vendors. In this area, you want to hold on to your money as long as you can. But, if vendors offer early payment discounts and you can afford to take it, go ahead. Sometimes, even if you have to borrow the money to pay early, it might make sense to do so. If you can borrow money at eight percent and take a two percent discount for 10 days early (2% 10 net 30) you are effectively earning 36 percent over a year. (If you do that, make sure the borrowing doesn’t put you at risk for running out of cash and not being able to pay your other bills.)

3. Inventory – Manage your inventory so that it doesn’t sit in a warehouse for too long. Once you’ve paid for the inventory, it should be sold and generate profit for you. Adjust your inventory for the seasonality of your industry so you’re never caught with too much.

An example of good management of these three factors would be to extend 30 day terms to customers, purchase inventory and turn it around in 15 days; and pay vendors in 30 days.

Financial planning doesn’t have to be complicated to be effective. Measuring the past 12 months of working capital performance, income statement performance, sales growth and profit, will give you a really good picture of your business and let you prepare for future sustainable growth.

Cash Flow Forecasting Keeps You in the Black

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by Anne Moore Odell

Like blood beating through the heart, cash flows in and out of a business. Cash flow is not profit. Rather it is the money coming into the business through sales and other revenues and it is the cash leaving the business, for example, as paid invoices and payroll. Cash flow, or cash on hand, is simply cash in minus cash out.

Cash flow forecasting, then, is the process of looking forward to what you expect your cash flow to look like over a set period of time. The period can be for a month, 12 weeks, or even as long as a year. It is an extremely useful tool for businesses as it can provide insights to improve profitability.  If management has a well-constructed cash flow forecast for the year ahead, it is in a strong position to plan, execute and control improvement measures.

“Forecasting cash flow helps businesses be realistic rather than idealistic”,  says Jack Koester, a  Counselor affiliated with SCORE(r) Lake/Sumter Chapter 414 in Florida. “Cash flow forecasts are tedious and require substantial due diligence. But survival is the main early benefit.  It always has been, but it is much clearer today.” SCORE(r) provides free online and face-to-face business counseling, mentoring, and training.

Creating a Forecast

A cash flow forecast is a written document that makes note of all the cash that you expect to receive and all the cash that you expect to pay out over a given period.  Plan for when you will receive payment on invoices so that you can efficiently time your payments to vendors.  To be useful the forecast needs to be updated frequently, honestly, and in the current economic times, conservatively.

There are many programs available to help with cash flow forecasting, but one of the best is one that your business probably already uses daily: Excel. “An Excel spreadsheet allows you to create a forecast that matches the size of your organization, the inflows and outflows,” says Mike Iverson, CEO of Trillium Financial.  These types of models can be effective ways to measure near term cash flows such as a rolling thirteen week plan.

For businesses interested in a cash flow software program, one provider is PlanWare.  Says Brian Flanagan, Director, PlanWare.org, “The simplest solution is to develop a cash flow forecasting plan using a spreadsheet. This can be a do it yourself worksheet or based on a template located on the internet.

Another option is a full software program that you can purchase such as PlanWare’s Cashflow Plan.  It offers a range of forecasting planners some of which are  integrated into your budget planning which includes a balance sheet, profit and loss statement, and a cash flow statement.  The benefit of the full software program is a change in sales automatically adjusts the cash inflows from receivables and values for cash and receivables in the balance sheet based on your assumptions.  These plans can be effective for longer range planning such as over a 12 month or longer period.

Cash Flow Forecasting in a Recession

“Many more companies are generating cash flow forecasts today. Cash is always an issue, even in good times,“ says Iverson. “I have more clients that forecast 12 weeks out, especially now. Cash flow forecasting for the next 12 months can be more difficult.”

Iverson adds, “With ever larger, more seemingly secure companies declaring bankruptcy, asking for extended terms, and making slow payments, cash flow  is definitely trickier than it has been in years past. Making it even more important to do.”

“If we feel clients are being too optimistic, we strongly suggest they project a separate set of cash flow projections based on a WORST CASE scenario. Sobering!” says Koestar.

“More of your Fortune 500 or Fortune 2000 companies are using cash flow forecasting. Typically, they don’t have a huge need to forecast cash short term,” Iverson adds. “But companies are making sure that they are going to have cash and capital, regardless of their size, forecasting more frequently and in shorter time frames.“

“In buoyant times, businesses were reasonably sure that cash would automatically follow on from profitable trading,” says Flanagan of Planware. “This allowed firms to gear up and pursue higher sales without worrying unduly about getting paid or securing additional credit for working capital purposes.“

Flanagan continues, “The downturn has changed all this and the key issue has become the maintenance of cash flow. This is, in many senses, more important than profitability as more businesses fail because they run out of cash rather than generate losses. Cash flow forecasting has become critical in two areas. First, short-term planning for receivables, payables and inventory to ensure that working capital (cash) is managed effectively. Secondly, medium-term forecasting, e.g. for 12 months ahead, so that firms can anticipate cash flow problems.”

Forecasting cash flow is always difficult. The recession has exacerbated this because it has disrupted established trends and patterns.   However, when forecasting during a recession, Flanagan has two suggestions: First, concentrate on higher-level forecasts as these can be just as accurate or possibly more accurate than very detailed projections. Second, make forecasts based on alternative scenarios, for example, “most likely case” and “most probable worst case”.  Aim to hit the former but take actions that presume the latter will occur.