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

What is the One Best Yardstick to Measure your Business Success?

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Mike Iverson’s client had it all figured out. He knew exactly how well his business was doing every month, without researching complicated data or paying an expensive consultant. He just looked at his phone bill. If the number of outbound calls was up, he could bet that his revenues for that month would be up, too.

A reckless, haphazard guess? Just the opposite. Iverson’s client had found a simple metric that he could track every month and immediately gauge the health of his business.

The concept of a simple metric as a forecaster of financial health belongs to Norm Brodsky, a successful serial entrepreneur and writer for Inc. magazine. The idea is for every company to find that one magic metric – the connection between a routine business function and the positive growth of a company.

“I think every business has it,” says Mike Iverson, Numbers Coach. “Every small business can put a finger on a certain key number that can tell you how you will end up that month.”

The trick, of course, is uncovering exactly which numbers have that relationship in your business. For example, if call volume goes up and sales go down, you’ve got the wrong metric. It is important to track as many numbers as possible in the beginning, because it may take two years (or more) to find the leading indicator. Also, recommends Iverson, track the numbers by hand. The process of writing the numbers down with a pencil and paper will help you realize the connections.

Here are seven important metrics for any business. Track them for 3 months and see which one gives the greatest transparency to the rest of your business:

  1. The Trailing 12-Month Sales Average: By monitoring – and graphing – sales from the 12 months prior, you’ll get a visual of the progress of sales, while taking seasonal issues out. If it’s July 2025, look at July 2024 through June 2025. Graph each month’s sales and see where the highs and lows were, and what the average was. If that 12 month average is trending up, it’s good. If the graph line is flat or declining something is causing sales not to perform.“If you look at just sales numbers month to month, you won’t see it,” says Iverson. “This is a visual metric: you want to see that 12-month trailing graph trending up.”
  2. Operating Profit Percentage: This shows the extent to which a company is making a profit on standard operations. When looking for indicating factors, ask, ‘Is this percent holding steady, increasing or decreasing?’  You can also examine this on a trailing 12-month average.
  3. Accounts Receivables Cash Conversion Cycle: If you extend credit to customers, track how long it takes to collect cash from the time the bill is sent. What is your cash conversion cycle (or DSO – Days Sales Outstanding)? Be careful about the terms extended to your customers; you have set them for a specific reason. If customers go beyond those time limits, you’ll feel the pinch.
  4. Days Inventory Outstanding (DIO): In theory, you should keep the least amount of inventory on hand as possible. In a perfect scenario, you would get the order in just in time to have it manufactured and sent out; the longer inventory sits unsold the more of a drain it is on your cash.
  5. Disbursement Cycle: These are the terms you get from your vendors. The longer you can hold on to your money and the faster you get it from your customers, the better.
  6. Working Capital as a Percent of Your Revenue: This is an important financial set of measures to look at because it is often overlooked by business owners, says Iverson. “They know to look at the income statement. But if all that operating profit is getting absorbed into working capital, then there won’t be enough cash flow to grow the business,” he says.Receivables and inventory are investments.  (And in the same way vendors have an investment in you.) You’ll want to invest as little as possible of your revenue in working capital. Turn your receivables to cash, your inventory into billing, and hold on as long as you can to your money. Look at the number of days net working capital is invested every month (or cents on the dollar of what’s invested). If you don’t have enough cash flow to cover what you’ve got invested, you’ve got a problem.
  7. Return on Capital Employed (ROCE ) Percent: According to FinanceScholar.com, ROCE measures the efficiency and profitability of a company’s capital investments. For example, capital assets such as trucks and computers should help make the business more efficient, cut down on costs and realize greater profits.  The ROCE percentage also indicates whether the company is earning sufficient revenues and profits in order to make the best use of its capital assets. The higher the percentage the better.

Tracking the numbers involved with these seven metrics over a period of time will give you an idea of which is the leading indicator for your business.

“It seems like the concept would be complex, something more to it. But really there’s not. If you break it down and keep it simple, the metric can give a business owner an easier way to digest information and act,” says Iverson.

Start measuring today so you can figure out what actions to take in order to achieve your financial goals.   The Numbers Coach can help; just contact us at (404) 353-2148 or mike@numberscoach.net.

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.

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.

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.

Consider using a Z-Score as one metric of credit worthiness. 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 )

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.

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.

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 the recession 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.

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.

Cash Flow Statement: The Best Starting Point for Business Planning

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by Michael Iverson

Check out this sample Cash flow statement for Acme Company

It’s my observation that most business owners review their financial statements in the following order:

  1. Income Statement
  2. Balance Sheet
  3. Statement of Cash Flow

Why is that so? Perhaps the most likely reason is that business owners borrow money. The lenders from whom they borrow focus on Income Statements and Balance Sheets, so those reports naturally become important to business owners.

However, when it comes to business planning and improving business results, I encourage clients to first look at the Statement of Cash Flow. As I’ve stated in previous articles, cash flow is often the most challenging metric for a small business to master. Balancing growth against the availability of cash is one of the most critical issues for a small business. Getting it wrong can put the business in peril.

Components of the Report

Unlike the Income Statement and the Balance Sheet, the Statement of Cash Flow is not based on accrual accounting. Rather, the report shows how a company generates cash and how its cash is spent. The concept of accrual accounting is matching the expense to the period when the obligation occurs or revenue to the period when it is earned. The cash flow statement is only concerned when a bill is paid or revenue is received.

The report has three component parts:  Cash Flow from Operating Activities; Cash Flow from Investing Activities; and Cash Flow from Financing Activities.

  1. Cash Flow from Operating Activities includes cash receipts from customers less amounts paid to suppliers and employees. The company in the example is generating healthy cash flow from its core operations.
  2. Cash Flow from Investing Activities shows a net cash outflow due to equipment purchases, which could be expected for a growing company.
  3. Cash Flow from Financing Activities is a large net cash inflow due to capital contributions and proceeds from a sizeable loan.

Check out this example for the ACME Company:  Cash flow statement

Improving Business Results
In the space of one year, the ACME Company in the example cash flow statement markedly improved its cash position. The beginning cash balance of $22,000 increased to $176,000 by year’s end.

During the same time span, the company invested in new equipment and replacement equipment. The new equipment might have been necessary for a new product line. The replacement equipment ensures against any unplanned disruption of existing production capacity. It appears that the company has prepared for continued growth over the next few years. With healthy cash flow from its core operations, the company is poised for growth opportunities.
Of course, there are risks involved with any new initiative or product introduction. Perhaps the new product line won’t do well which could put pressure on repaying the loan. To help mitigate those risks, setting aside cash as a reserve affords some breathing room if new initiatives don’t work out.

What is your Statement of Cash Flow telling you about your business? Have you achieved a cash position that provides a reasonable cushion for unforeseen events? If an incredible growth opportunity presented itself today, would you be able to act decisively?

If you would like to discuss how your business is positioned, contact us.  We’re glad to help you create and interpret your Cash Flow Statement.

How Weak Cash Flow Affects Your Business

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by Michael Iverson

In a recent article, I discussed a company that had greatly improved its cash position in a year’s time. To complete the discussion, it’s important to consider reasons why a company’s cash position might deteriorate from one year end to the next

Take a look at the following Statement of Cash Flow:

Statement of Cash Flow for ABC Company for the year ended December 31, 2013

Cash Flow from Operating Activities   

Cash receipts from customers                     568,000

Cash paid to suppliers and employees       (622,200)

Cash generated from operations                  (54,200)

Interest received                                                    500

Interest paid                                                       (1,200)

Taxes paid                                                         (2,900)

Net Cash Flow from Operating Activities         (57,800)

Cash Flow from Investing Activities

Equipment additions                                           (10,500)

Replaced equipment                                           (24,200)

Proceeds from sale of equipment                           1,900

>Net Cash Flow from Investing Activities             (32,800)

Cash Flow from Financing Activities

Proceeds from capital contributions                   12,100

Repayment of loan                                             (19,300)

Net Cash Flow from Financing Activities             ( 7,200)

Net Increase/Decrease in Cash                 (97,800)

Cash at January 1, 2012                               122,600               

Cash at December 31, 2012                           24,800

In the statement above, the Cash Flow from Operating Activities is a negative number. As you can see, cash receipts from product sales are exceeded by the cash paid to company employees and suppliers. That’s not a good sign.

The objective of any business is to generate cash sufficient to cover all expenses and pay owners/investors a reasonable return. In this instance, the product sales for the business didn’t quite meet the costs associated with manufacturing and selling the product. Unfortunately, there were no returns on investment for the owners and investors.

Rapid Depletion of Cash

Looking at the cash balances at the beginning and ending of the year ($122,600 to start the year vs. $24,800 at year’s end), the healthy cash balance at the start of the year was seriously depleted by year’s end. The situation is serious enough to threaten the viability of the business.

The problem is the company’s negative Cash Flow from Operating Activities. By reviewing the year’s budget, we could determine the extent to which actual Sales for the year fell short of budgeted Sales. If actual Sales fell short of budgeted Sales, we would further examine the reason(s) why.

The other possibility is that the Sales was fine, but collections for products sold fell far short of expectations. In other words, product sold and delivered was not paid within the payment terms provided to customers.

Cash Flow from Investing Activities shows that equipment purchases totaled $34,700, increasing the negative cash flow. Since equipment purchases could include both replacement equipment and new additions for product expansion, these investments can put a further strain on the business.

Capital Contributions Required

The owners contributed $12,100 in capital during the year, however, loan repayments used $19,300 of cash. Are there more loan repayments due in 2014 and beyond? If so, then the owners will likely be required to contribute in 2014, assuming the cash flow from operating activities continues to be negative.

Borrowing money from a bank will be difficult given the company’s poor cash flow.

Keep a close eye on your Cash Flow from Operating Activities and understand the drivers of this number. This knowledge can be the difference between staying in business and going out of business.

If you would like to discuss how your business is positioned, contact us.  We’re glad to help you create and interpret your Cash Flow Statement.

Know the Real Flow of Money Through Your Business During a Year

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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 – but 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 selling season.

“You can’t just set a $12 million goal, and divide the revenue figures by 12 for the year,” says Iverson.

12-Month Trailing Budget

One financial management tool that is useful in managing cash is a 12-month trailing budget versus actual. 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 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 plan.”

Three Key Elements of Budgeting

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.

If you would like to discuss more creative ways to manage cash flow, contact us.  We’re glad to share our ideas!