cash flow

In this the 2nd part of a two part episode, Lisa will give you several tips to improve cash flow in your business from the payment or cash outflow side of your business.

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Show Notes

Entrepreneurs know that one of the most critical aspects to running a healthy business is to maintain a good level of cashflow.  In this the 2nd part of a two part episode, Lisa will give you several tips to improve cash flow in your business from the payment or cash outflow side of your business. She also explains how using some of these tips together can help build momentum and improve your cash over time.

Key Points

*Working with the terms your vendor offers you opportunities to improve cash including using the amount of days given as well as any early payment discounts that may be offered.

*Lisa discusses ways to negotiate with vendors to improve payments terms as well as managing payment methods to stretch out cash payments without incurring additional fees.

*Cash flow can be affected by decisions made surrounding inventory management and a few tips and stories were shared in this area.

*Lisa shares how investing in a resource in the purchasing area can help improve cash by monitoring activity and coordination in the spending area.

*Tips were shared how cash outflows can be managed in expenses like payroll and large purchases like equipment as well as the owners own pay.

*Lisa describes how she believes that the tips provided in these two episodes can help build upon one another and create an improved cash flow for a business.

Resources and Links

25 Ways to Improve Cash Flow Tip Sheet – Subscribe to Lisa’s newsletter, Prescription for Success to get the tips sheet and get information tips and strategies to run, lead and grow a healthy business.  Follow this link to sign up and get the tip sheet!

Other episodes referenced in this episode:

Learn about the money rollercoaster in the very first episode of Healthy Business Healthy Profits – What Makes a Business Healthy?

If you’d like to talk with Lisa about this or any business problem you’re having surrounding your growth then you may want to set up a Quick Care Consultation session her.  Check out more about that here

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Prescription for Success

Get all the updates and information Lisa shares from Business Rx and the Healthy Business Healthy Profits show! You’ll get information, tips and strategies on growing a healthy successful business. Don’t worry, I won’t bombard you with emails.  At most, you’ll get something from me every few weeks. You can sign up  Here

Lisa Roberts is a business operations consultant who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track.   You can find out more about her here

Entrepreneurs know that one critical aspect to running a business is a good level of cash flow. Listen to hear the first 14 tips to improve your cash flow.

To listen to the episode now hit the play button above.

To download the episode to listen later, right click on this link  and choose Save Target As.  Go to the folder where you want to save the recording on your device and click Save or Enter.

Get upcoming episodes by subscribing to the show on Apple Podcasts . Subscribing to the show will automatically download the episodes on your preferred listening device so you can listen to them when and where you want.

And hey, if you like what you hear, please leave the show a great rating and review while you are there on Apple Podcasts.

Show Notes

Entrepreneurs know that one of the most critical aspects to running a healthy business is to maintain a good level of cash flow.  In this the first part of a two part episode, Lisa will give you several tips to improve cash flow in your business.  She also stresses the importance of staying on top of cash flow to run a healthy business for the long-term.

Key Points

*Entrepreneurs rely on a healthy level of cash flow to finance growth and avoid problems in their business.

*You’ll hear ways to manage and maintain the billing and collection function in your business and steps to take to set yourself up to collect on outstanding accounts.

*Lisa shares tips on ways to manage payment methods and payments terms to ensure that you are collecting your cash in a timely manner.

*Lisa and Winnie discuss the positives and negatives of changing your standard payment terms especially with long time customer and what you can do with slow or non-paying customers.

*Hear ways that you can use financing to enhance and supplement cash flow in your business.

*Lisa discusses ways to generate additional cash in your business that can streamline and enhance cash flow.

*Many of the tips shared in this episode on focus the receipt of cash side of the business like sales, receivables and payment methods.

*In Part 2, Lisa will share tips to improve cash flow on the payment side of your business. So subscribe to the show and  look out for Part 2!

Resources and Links

Other episodes referenced in this episode:

Insider Secrets for Success in a Family Business

Cost and Pricing – What You Need to Know

Have questions about cash flow in your business, set up Quick Care Consultation with Lisa to learn how some of these tips could work in your business.  Learn more here

About Lisa Roberts

Lisa Roberts is a business operations consultant who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way.  She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track.

 

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Prescription for Success

Get all the updates and information Lisa shares from Business Rx and the Healthy Business Healthy Profits show! You’ll get information, tips and strategies on growing a healthy successful business. Don’t worry, I won’t bombard you with emails.  At most, you’ll get something from me every few weeks.  Sign up  Here

Lisa Roberts is a business operations consultant who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track.   You can find out more about her here

Cash collection is an important part of any business but especially one that is growing. Listen to learn tips on collecting your cash in your business.

To listen to the episode hit the play button.

To download the episode, right click on this link  and choose Save Target As.  Go to the folder where you want to save the recording on your device and click Save or Enter.

Make it easier to get upcoming episodes by subscribing to the show on iTunes . Subscribing to the show will automatically download the episodes on your preferred listening device so you can listen to them when and where you want. And hey, if you like what you hear, please leave the show a great rating and review while you are there on iTunes.

Show Notes

Cash collection is an important part of any business but especially one that is growing.  Many businesses rely on cash to fund their growth.  In this episode, we’ll talk through all the aspects of the cash collection cycle and highlight the mechanisms and processes that help entrepreneurs maintain cash flow.  We’ll also discuss areas where things can breakdown and give tips on the types of processes that can help avoid those problems.

Key Points

*The cash collection cycle can vary among different types of businesses.

*Companies that rely mainly on credit cards can avoid many of the steps in the collection process because they have credit card companies perform those steps for them.

*Accepting payment direct from customers creates additional steps that companies must take to ensure payment.

*We touch briefly on the problems small businesses face from credit card and online payment services in the areas of chargebacks and fees.

*Lisa explains internal process steps on both the collection side as well as the pre-sale approval side.

*For repeat customers, credit standing also needs to be monitored to watch for customers who fall behind in the payments and processes need to be in place to react to those situations.

*Once an order is approved and shipment takes place, processes need to document the shipment and create an invoicing package to support the billing to the customer.

*Process steps in this part of the cash collection cycle are designed to create a valid, approved transaction as well as a documented shipment to help create the invoice package.

*An invoicing package should contain all the elements of the transaction – approved order, customer credit check and documentation of shipment – invoice.

*The next steps in the cash collection cycle is the actual collection of the cash payment on the account as well as the monitoring of the Accounts Receivable Aging Schedule to make sure customers don’t fall behind in their payments.

*The final step of the cash collection cycle is the proper handling of cash and ensuring that it is deposited into the bank and properly accounted for in company books and records.

*Lisa closes the discussion with tips about segregating duties inside your company to minimize the opportunity for misappropriating cash by your employees.

*Entrepreneurs need to keep in mind that this cycle needs processes that create checks and balances to safeguard cash and to also minimize the time to collect cash.

Resources and Links

Entrepreneur Magazine article Lisa mentioned in the episode –  Think You Can’t Win Against Chargebacks? Think Again.  by Joe Keohane

Have questions about cash collection and management in your own business, get in touch with Lisa for  Quick Care Consulting Session using this link

Note: Links in this post may be affiliate links.  Lisa Roberts is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.

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Prescription for Success

Get all the updates and information Lisa shares from Business Rx and the Healthy Business Healthy Profits show! You’ll get information, tips and strategies on growing a healthy successful business. Don’t worry, I won’t bombard you with emails.  At most, you’ll get something from me every few weeks. Sign up  Here

Lisa Roberts is a business operations consultant who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track.   You can find out more about her here

In this epsiode of the podcast we cover mistakes business owners make in the financial management side of running their business.

To listen to the episode hit the play button.

To download the episode, right click on this link  and choose Save Target As.  Go to the folder where you want to save the recording on your device and click Save or Enter.

Make it easier to get upcoming episodes by subscribing to the show on iTunes . Subscribing to the show will automatically download the episodes on your preferred listening device so you can listen to them when and where you want. And hey, if you like what you hear, please leave the show a great rating and review while you are there on iTunes.

Show Notes

It’s easy for entrepreneurs to get caught up in the day to day and lose sight sometimes of the big picture. One aspect of that big picture is managing your company’s finances. In today’s episode we cover some of the mistakes business owners make in managing their business’ finances.

Key Points

*Too often, entrepreneurs focus on sales and not enough on the overall results and financial position.

*Your overall financial results provide opportunities to see potential problems early so that you can act to deal with them.

*Not managing cash flow and overspending is another mistake entrepreneurs make in financial management.

*Using credit and debt and relying too much on credit to run the business can also create problems for a business owner.

*Poor management of receivables and poor credit policies is another area where mistakes are made in businesses.

*Failing to use budgets and other measures to track performance is an area that entrepreneurs make mistakes and lose the ability to manage and monitor their business more effectively.

*Make financial, budget and key performance indicators part of your Monthly Financial Management Review.

*Managing cash flow involves using a cash flow forecast, effectively managing receivables and payables as well as monitoring inventory and spending.

*Lisa talks about the different costs in your business and how they impact the cash and cash flow.

*Using credit is acceptable but too much reliance on it could be masking bigger problems in your business.

*Lisa discusses some best practices related to accounts receivable to manage and monitor collections and cash flow.

*DSO’s or Days Sales Outstanding is discussed and how you can use a metric like it to measure your collection performance.

Resources and Links

Note: Links in this post may be affiliate links.  Lisa Roberts is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.

Tip Sheet – Mistakes Entrepreneurs Make When Managing Finances – Subscribe to my list to get your free copy here

If you making some of these mistakes in your business you can set up a consultation session with Lisa Roberts to get her advice on how you can avoid these mistakes going forward.  Follow this link to set up a session with her.

Books mentioned in this epsiode:

Power of Habit: Why We Do What We Do in Life and Business, by Charles Duhigg-  follow this link http://amzn.to/2lk2Grm

Lean Start-Up, by Eric Reis follow this link http://amzn.to/2lg2BJp

Other podcast epsiodes you may want to check out:

Cash Flow Forecast episode https://www.bizrx-advisors.com/managing-cash-flow-forecast/

To learn more about budgets as mentioned on the show check out the episode  Growth and Spending What Your Need to Know https://www.bizrx-advisors.com/growth-spending-budgets/

Sign Up to Get Updates

Get all the updates and information Lisa shares from Business Rx and the Healthy Business Healthy Profits show! You’ll get information, tips and strategies on growing a healthy successful business. Don’t worry, I won’t bombard you with emails.  At most, you’ll get something from me every few weeks. You can sign up  Here

Lisa Roberts is a business operations consultant who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track.   You can find out more about her here

Cash flow is the lifeblood for many businesses. Managing cash and forecasting cash needs is important for managing your company’s growth.

To listen to the episode hit the play button.

To download the episode, right click on this link  and choose Save Target As.  Go to the folder where you want to save the recording on your device and click Save or Enter.

Make it easier to get upcoming episodes by subscribing to the show on iTunes . Subscribing to the show will automatically download the episodes on your preferred listening device so you can listen to them when and where you want. And hey, if you like what you hear, please leave the show a great rating and review while you are there on iTunes.

Show Notes

Cash flow is the lifeblood for many businesses. This is especially true for both start-ups and growing companies.  Often a growth company has to spend money before making money.  So, being able to manage cash and cash flow becomes much more important in order to sustain and manage growth.  Today’s we’ll look  at how a cash flow  forecast can help you manage cash and also plan your cash needs as you grow your business.

Key Points

*Cash flow is a challenge for growing businesses because of the lag between company spending and receiving cash from customers.

*Growth takes investing money and due to the ups and downs of growth as well as limited outside investments, managing cash becomes very important.

*There are several signs that a business isn’t managing cash effectively such as cash crunches, inability to make payments, overreliance on debt as well as stress for the entrepreneur.

*Cash flow forecasts help entrepreneurs place a focus on cash both planning and managing it.

*There are tools available in most accounting programs that can help you do a cash flow forecast or they can be set up in an Excel spreadsheet.  See resources below for a cash flow forecast example in Excel.

*Lisa explains how a cash flow forecast works functionally and explains various types of cash inflows and outflows for typical businesses.

*She discusses the different issues to pay particular detail attention to in cash control such as the timing of collection on account and larges purchases like equipment and other large purchases.

*Once the cash flow forecast is prepared. Lisa discusses the types of things that you should be looking out on your forecast so that you can take some action.

*Lisa provides some tips surrounding the billing, payment, inventory and fixed asset cycle that may help improve your cash flow.

Resources and Links

Note: Links in this post may be affiliate links.  Lisa Roberts is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.

Simple Cash Flow Worksheet – to get the worksheet sign up to received my newsletter, Prescription for Success.  You’ll get an email to confirm your subscription and then you will get the page to download the worksheet. Use this link to sign up.

Terms Used in this Episode

Cash Flow – The amount of cash coming in and going out of your business.
Cash Flow Forecast – A tool to estimate the amount of cash at the end of various periods based on estimates of cash expected to flow in and out during the period.
Cash Inflows – Cash that is brought into your business from various sources such as sales, loan proceeds and investments in the company.
Cash Outflows – Cash that is paid out of your business for various purposes such as payments to vendors and employees, repayments of loans and payout of dividends.
Cash reserves – Cash accumulated and held in your business to meet some future need or investment in the business.
Payment Discounts/Pay Early Discounts – A discount offered by a company in order to encourage customers to pay earlier than the normal credit term.
Account collections – The activity of collecting payment of funds on invoices owed to a company by the due date.

Sign Up to Get Updates

Get all the updates and information Lisa shares from Business Rx and the Healthy Business Healthy Profits show! You’ll get information, tips and strategies on growing a healthy successful business. Don’t worry, I won’t bombard you with emails.  At most, you’ll get something from me every few weeks. You can sign up  Here

Lisa Roberts is a business operations consultant who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track.   You can find out more about her here

I’m a bit of a business junkie. I love shows like Restaurant Impossible, Bar Rescue and Shark Tank and I even liked watching Tabatha Salon Takeover when that was on TV. One show I’ve have been watching is called The Profit. It’s about a businessperson who goes into businesses, fixes them and invests in them at the same time. One episode is a great reminder that not managing cashflow can get you in real trouble.

 

Managing Receivables for CashFlow

The company featured in the episode seemed very successful by outward appearances. It was a 75-year family business, run by the second generation and making over $50 million in sales. Sounds great, but they are losing about $400,000 per year and have a lot of debt. They face some real problems both operationally and financially. However, the one problem I want to concentrate on here is their uncollected receivables. In this case, there were $4 million in receivables but at least $1 million were extremely old and hard, if not impossible, to collect.

The episode struck me because I saw the same thing several years ago with a tile distribution company that was being run poorly and they too let their receivables get totally out of control. Management didn’t take our advice and unfortunately about a year later went out of business also bringing other businesses down with it.

A Prescription for Managing Receivables

Here are some tips that you can use to avoid having your sales tied up in uncollectible accounts and avoid the same fate as the tile company.

Extending Credit

A business that extends credit to its customers’ should have a credit policy that it follows to minimized credit risk. We don’t often think about it as credit but even accepting a check is a form of credit risk because checks can bounce. Accepting credit cards is one of the least risky ways to accept payment. However, sometimes industry norm requires you to extend credit “on-account”. If that is you, then running credit checks, getting credit references and setting the right amount of credit to extend (credit limits) will help you to minimize the risk you face by extending credit in the first place.

Accounts Receivable Review

Most accounting packages provide an Accounts Receivable (A/R) Aging Report that shows a list of your receivables and the age of the account. Review this report regularly to highlight accounts that have or are about to become past due. The past due accounts need to be followed up and called on to get customers to pay. In the show The Profit, some accounts got so old that the customer had actually gone out of business. The sooner you pursue the money the easier it will be to collect. The old idiom, “the squeaky wheel gets the grease”, is true in collecting receivables so stay on top of outstanding accounts.

Collection Practices

Your business should have policies and practices about handling overdue accounts and methods for securing payment. Getting customers to pay, commit to paying on a certain date and what next steps you will take if the amount remains unpaid, such as using a lawyer or collection agency, should be part of your policies and practices.

Accepting New Orders

Ironically, some companies will sell new products and services to customers who are far behind in their payments. I understand that there are times when you will decide to sell more on-account to a customer with an outstanding balance but there must be good business reasons behind it. By good business reasons, I don’t mean that you decide to take new orders just to pump up your sales because remember sales don’t equal cash. Good business reasons means decisions based on sound business practices. This is where your credit limits, collections policy and collections practices come into play and help guide you in making the best credit decisions.

Don’t Forget that Sales Don’t Always Equal Cash

Be careful not to be one of those businesses that pays so much attention to sales and forgets that a sale means absolutely nothing until the cash is in your bank. Managing receivables is a big part of managing cashflow. Good cashflow means turning receivables into cash quickly, so that you can pay your bills and yourself.

Generating Cash Flow

As the economy continues to struggle and credit remains somewhat tight, managing your cash flows is taking on greater, if not, critical importance in survival of your business.  Managing cash flow is an important activity to ensure that you are generating more cash than you are paying out and thus avoiding taking on too much debt to finance your operations.  In a moment, I’ll share a key performance indicator that you can use to monitor one aspect of cash flow, but first a little background.

One of the first steps to maximizing your cash flow is to clearly understand how cash is generated in your business. Then you can identify areas where you may be able to improve your cash conversion cycle.  The main sources of cash inflows in a business are the sale of goods and services, investment and lenders.  Your business may acquire cash through investment in the business or from loans and lines of credit. However, the largest source will be from sales.   To be successful in your business, you must ensure that those sales are converted to cash as quickly as possible to accelerate cash flow into your company.

Extending Credit

The ways in which sales are converted to cash may depend, in part, on the type of business that your company is engaged.  A business to business (B2B) relationship will have to make some different decisions when compared to a business to consumer (B2C) relationship.  The main difference is that a B2B will almost always be forced to extend credit on account, where the B2C will not unless it chooses.  The B2C company also has the luxury of relying on credit card companies to absorb some of their credit risk.

A business can never completely eliminate credit risk, but building a good credit and collection policy will help to minimize this risk.  Once you establish a good credit and collection policy it is important that you adhere to it and monitor it.   There are some very good articles written to assist you in setting up a good credit and collection policy so we will not go into that here.  Once you have policies in place you must monitor your results closely.

Key Performance Indicator for Cash

One key performance indicator that will help you to monitor your cash inflows from credit sales is called Days Sales Outstanding or DSO.  The DSO key performance indicator or KPI will indicate the average number of days it takes the business to convert credit sales to cash.  The formula to calculate your DSO is as follows:

Total Outstanding Account Receivable divided by Total Credit Sales for the period being analyzed. Next, multiply that by the number of days in the period being analyzed to arrive at your DSO. 

 

A higher DSO will indicate that you have a potential problem in collections and a lower number will indicate that you are converting sales into cash effectively.  Here is an example for illustration: Assume total receivables of $1,100,000 and sales of $5,365,000 and a period analyzed of one year.  Your DSO would be 75 days which says that it is taking 75 days, on average, to turn your credit sales into cash.

Monitor Your DSOs

Over time, businesses monitor their DSO to detect changes that may be adversely affecting their cash flow. As you review your own DSO’s, you should look for trends either up or down.  A good trend is a declining DSO while an increasing trend is troubling for your business. For example, if your business sells on account at net 30 days and your DSO’s are at 75 days, this suggests there is a problem in your credit and collection activities and action should be taken. Furthermore, if you are required to pay your own bills within 30 days, it will become a much larger problem for your business as this gap widens.

If your DSO’s are trending up, there are a few areas to investigate and questions to ask.

  • Is the credit and collection policy being implemented and adhered to consistently?
  • Are you ensuring that customers establish their creditworthiness? Do you perform credit checks or keep limits lower until they prove they are creditworthy?
  • Do you bill customers in a timely manner?
  • Are you using an aging schedule and tracking past due accounts closely?
  • Do you have certain slow paying customers that are contributing to the trend and are you sending dunning letters or contacting them to follow up on past due invoices?
  • Are you following up with past due accounts to ensure that the shipment was received and correct?
  • Is the economy changing and having an adverse effect on customers’ ability to pay?

By answering these questions, you will be able to assess the reason for adverse trends in your DSO’s and formulate actions to improve the situation and ultimately improve your cash inflows. Take steps to improve your cash inflows, it could be the difference being in business or being out of business.

How Well Are You Managing Your Business Finances?

Sometimes business owners get so caught up in managing the day-to-day in their business that they forget some of the basic things they can do to effectively manage their finances in a healthy way.  When I have conversations with business owners, one of the things I try to find out is whether they are managing their finances and cash flow effectively.  Those conversations go a little like this:

Q. How is your profit?

A. Ok, my sales were up last month.

Q. Great! But I asked how your profit level was?

A. Oh, well I don’t know my books haven’t been updated in six months.

Q. Ok, well how is cash flow then?

A. Not great, I am having trouble paying my bills because my customers aren’t paying on time. It’s causing problems for me and my business but I don’t know what to do about it.

And so it goes, business owners living in the moment, managing day to day, and not taking steps to run a healthy business.  There are some common mistakes business owners make managing the financial aspects of their business.

Don’t Make These Mistakes Managing Your Business Finances

heart stethescope finances health

1. Not Using the Information Right in Front of You

The best information you have about your business is in your own books.  The books tell you how much you sold, how much you spent, what is left in profit, how much cash you have, how much cash you owe and how much cash is owed to you.   If you don’t keep up with this information, you only know part of your financial picture.  You are losing the valuable opportunities to analyze results, determine real profitability and manage cash flow. You’ll also have difficulty identifying problems in your business.

2. Ineffective Cash Flow Management

This is one of those critical areas that can make or break a business.  Cash flow becomes even more important for a growing business, since the investment in growth typically occurs before the rewards of that growth are realized.  Like the old adage says, “You have to spend money to make money.”  In many small businesses, cash flow is the lifeblood that keeps you in business. Most companies need to build cash reserves to finance future growth.  Larger businesses have credit more readily available.  A smaller business sometimes needs to finance its own growth, thus making cash flow management a very important factor in its ability to expand.

3. Ignoring Receivables

Getting paid, sounds easy, right?  Not always. Too many late paying or non-paying customers can choke your business.  While this discussion could fit in the cash flow section, it deserves additional emphasis. Collections, collection policies, timely follow-up with customers, steps to reduce exposure, and other techniques are important to ensure that you get paid on time and keep cash flowing into your business.

4. Using Credit Effectively

No one in their right mind would finance a house with a credit card; you would never pay it off with interest rates that high.    Using the right type of credit for your purchases is essential to good credit management. The type of credit a business uses for short term cash needs like inventory should not be the same as the credit facility it would use to purchase a new expensive piece of equipment or longer lived asset like a new building.  If you need to use credit to finance part of your business, work with your lender or advisor to make sure you are using the right credit for the situation.

5. Not Measuring Your KPI’s

I have talked to business owners who thought that they were doing well, only to show them that they could be doing much, much better.  If your books and financial statements are current, you will be able to calculate key ratios for your business.  KPI’s are key performance indicators and while there are some that are fundamental for all businesses, some may be more important than others for your own business.  Determining and measuring what makes your business successful through your own KPI’s will help you take action when needed. KPI’s like profitability, inventory turnover, average collection periods, gross margins, productivity ratios and host of others will help you target  inefficiencies in your operations. They can also highlight opportunities for improvement and cost savings as well as other ways to increase profitability.

 

Take some time to step out of the day-to-day chaos and look at the bigger financial picture.  Avoid these mistakes and you will be on the right track to managing, improving and taking control of the financial health of your business.

 

Sales are important in any business but a good cash flow is even more important and improving cash flow is one of the most powerful things that a business owner can do to create a more successful business. Exploring ways to increase cash flow will force a business owner to look not only at inflows, but also outflows of cash. The cost side can provide opportunities to improve your cash too.

For many businesses the top expense categories are cost of sales, inventory, wages, employee benefits, taxes, energy and rent. By finding savings in these high value categories, a company can see their bottom line grow and their cash flow improve.

Analyze Your Costs

In order to highlight opportunities for savings in the cost of sales, conduct a spend analysis and review your current supplier contracts. A spend analysis monitored over time will illuminate high dollar expenses and provide a starting point to attack some cost reductions.  Next, review your contracts with suppliers and negotiate cost reductions.

Your review could entail working with suppliers on programs to identify cost improvement initiatives.  These negotiations could also include having suppliers perform more services for you so that you lessen costs in your own business. In addition, process improvement initiatives and technological efficiencies have produced cost savings in many supplier companies that can be extended to your business in the form of price reductions.

Review and Monitor Inventory

The Periodic Review of inventory, period end counts, traditionally has been one of the main ways companies have identified excess costs such as obsolete or slow moving inventory.  While this method continues to be important, it is routine and other methods can be used to complement the periodic review. Many small and medium sized businesses can use inventory ratios to monitor and benchmark their inventory control practices.

The owner can identify areas where cost can be managed more effectively by monitoring inventory turnover. Slower turnover may reveal that there are slow-moving or obsolete items in inventory. It may further reveal that inventory order quantities are not correct and goods are sitting on the shelf too long. With this knowledge, the owner can act and create systems design to effectively manage things like economic order quantity, usage rates, lead times and obsolete items.

Review Larger Operational Costs

Wages and benefits are another large expenditure in many businesses as we have moved to a service oriented economy. For a business to compete for good quality personnel, the owner should have a firm understanding of the market for salaries in his industry and in the region where the business in located. Since certain job skills become hot while still others become a commodity, salaries in the market place change over time and business owner must adjust.

Understanding the market for the types of employees utilized in your business will help to ensure that you are not over or under paying for the skills that are required to run your business. In addition, a business should also define its own pay philosophy which describes how employees are paid and what types on benefits or incentives employees are offered. As pay for performance has come into vogue, businesses need to determine if that is right for their business and incent the desired performance of their employees in order to get the best return on the payroll expenditure.

Plan and Budget

Budget planning is a tool that businesses use to control and anticipate expenditures as well as select from the best alternatives for cost effective solutions.  Tax planning can perform the same function for tax expenditures in a business.  Surveys have shown that companies who actively plan and manage their decisions while taking into account the tax impacts have more effectively kept their tax costs lower than companies that did not.

Larger companies can hire people in-house that are specialists in this area but a small business must use his own outside tax accountant to perform this function.  Keep in mind, your outside accountant can help in the planning and execution stages. However, your accountant’s hands are tied after the transaction is complete, so involve them early in the planning and decision-making process.

Cost of Energy

Energy savings and going green are hot topics in the news and whether its skyrocketing gas prices, or new computer equipment that uses more power to operate, companies must consistently look for ways to save cash in this category.  Fortunately, there have been innovations in these areas that help businesses bring down these costs.  Business owners should review their energy expenditures and put in place programs to control and manage their energy use.  It may involve simple solutions for a small business like using programmable thermostats, turning off computers when not in use or using occupancy sensors in certain areas so that the lights are turned off when the room is not in use.

Larger companies may need to combine the efforts of their facility and IT teams to research better energy efficient options to run the company’s infrastructure.  Here businesses may consider solutions that include smart technologies that control the cooling of systems and servers, utilizing the internet for meetings to avoid travel costs or even installing solar panels to generate your own power. With the rising costs of energy and the additional power requirements of computer equipment, it is necessary for companies to continuously explore solutions to achieve savings.

Rent – A Large Recurring

A sometimes overlooked, but large, recurring cost for a business is rent.  Many businesses sign long term lease agreements and then forget about them until the agreement nears the end of its term.  Changes in real estate values and occupancy rates can alter the going rate for commercial rentals.  Periodically, a business owner can explore the alternatives and work with their landlord to obtain potential savings or additional rental perks for their business.

We have only touched the surface. This post was meant to get business owners to begin to think about some of the ways to explore savings in areas that carry large costs for a business.  By cutting costs in these high expenditure areas, a business owner has the opportunity to greatly enhance his cash flow and create savings to fund investment for the future.

How’s Business?

I am always surprised when I hear small business owners tell me that they haven’t updated their bookkeeping in several months and they are not concerned about it.  How do you know whether you are profitable? How are you managing cash flow?  The response I get sometimes is “well, I know where my sales are and that’s enough”.

Sales are sales. Profit is profit. Cash is cash.   Increased sales do not always mean increased cash and increased sales do not always mean increased profit.   Let me illustrate with a few simple examples below.

Sales Don’t Always Equal Cash

If your sales are $5,000 and your cost is $2,500 to produce those sales, you would show a profit of $2,500 on your books.  Let’s say that you haven’t gotten paid for that sale, your cash flow is a negative $2,500 and will remain that way until you get paid. Sales don’t always equal cash.

More Sales Isn’t Always More Profit

In addition, sometimes increasing sales may not increase profits.  Let take the example above a step further and say your fixed expenses are $1,500.  Your net profit in the above example is $1,000.  Let’s assume further that you’re getting squeezed by the competition. As a result, you decide to lower your prices in order to achieve more sales and you sell twice as much product.  Sounds great right?  I doubled my sales!  Your new sales figure with the reduced price is $7,500, your costs are $5,000 and your gross profit is $2,500.  But your net profit is still only $1,000 after taking into account your fixed expenses of $1,500.   More sales don’t always equal to more profit. 

It’s More Than Sales

These examples are very simple and in real life business isn’t always that simple and may in fact be much more complex.  This is all the more reason to have a good handle on several aspects of your business, not just sales. Business owners cannot run a business by looking at sales alone or they won’t be in business very long. Yes, they may get lucky and survive and as the adage goes “better lucky than good”.  There is also another saying that goes something like “you make your own luck”.

Know Your Numbers

As a business owner you need to have a solid understanding of the key financial ratios in your business.  You must know where you stand financially and know your margins, variable costs and fixed costs. By understanding your gross margins and break even levels, you can make smarter pricing, sales and expenditure decisions.

Start by making sure your records are up to date.  Maybe you need to hire a bookkeeper or set aside time to record the data yourself.  Then, analyze the information in your financial reports so that you have a complete understanding of your gross margins, inventory turnover, expense ratios and profit margins or whatever other important ratios drive your business. This will provide important in identifying favorable or unfavorable trends that may arise and enable you to make good sound decisions in your business.

Manage Your Cash Flow

Now that you have a good handle on your financial results, another important tool business owners should also use is a cash management tool to monitor and control cash flow. A cash management tool will enable you to set out your monthly receipts, costs and expenses so that you can monitor your cash inflows and outflows.

Monitoring cash flow gives you the ability to see where cash may be tied up in your business.  You’ll be able to spot bottlenecks especially in your cash inflows such as identifying problems like slow paying customers. It can assist you in planning your expenditures and help you to make better decisions in managing expenses in your business. Further, it may help you lessen your dependence on loans or credit lines and save interest as you rely on better cash flow decisions to maximize cash and finance your business from operations instead of relying on debt.

For most small businesses, it is about profit and cash.  Make your own luck, take control of your business and make informed decisions by maintaining your books and managing your cash flow.