Cash Flow – King of Business

 “Positive assets and negative cash flow” is a common issue for small business.  Manage your cash flow or perish.  John Formento Jr., analyst with the business-information firm Sageworks warns that it is not sales volume but cash flow which determines the survival of many small businesses. 

 

Keys to Cash Flow Management

 

1.      Accounts Receivable – If you don’t pay attention, your customers won’t either.  Whose account is due or overdue?  What is their payment history?  If they are consistently early, reward them in some way;  bonus gift, discount, special low purchase price on something they like or better yet some new product they might start purchasing.  Give a discount for early payment and a penalty for late payment.

 

2.      Accounts Payable – Don’t pay more than a day early without a discount and never late.  Late payments damage your credit rating and cost you penalties.

 

3.       Due Dates – Adjust your payment due dates to be 5 days AFTER your cash flows in.  This gives you time to mail the payment or pay it online through bill payment; most banks have a free bill payment where you can schedule your payments, track payment history and not even pay postage.  Negotiate better payment terms; it is your reward for an excellent payment record.

 

4.      Investigate before you say yes – Credit is a privilege.  Ask for three to five references and check them; no intelligent person will give you a bad reference but check references every time.  Know the questions to ask:

 

·         Tell me about their payment history.  Are they early, on time or late?

·         If they are late, how late and how often are they late?

·         How often do you have to send them reminders?

·         How long have them been your customer?

·         Overall how do you rate them as a customer – purchasing, payment and______?

·         What question have I not asked that I should have asked you about them?

 

5.       Spend Wisely – Require a valid purpose for each expenditure and insist on receipts.

 

6.       Inventory – Prioritize what you stock and how much: fast turnover, high margin, slow turnover, low margin.  Excessive inventory or the wrong inventory ties up cash and storage space.

 

7.      Plan Ahead – Know what bills are coming due and on what date.  Plan cash balances in advance to cover the expenses on time.

 

Effective Cash Flow

 

Seasonal businesses are particularly vulnerable to cash flow issues.  Mountain Castles Property Management in Steamboat Springs, CO would set aside significant amounts of cash from the lucrative ski season income to cover the shoulder season after the ski season closed and before the summer tourists arrived.  Summer was a slight positive cash flow followed by another shoulder season before ski season reopened.  This second shoulder season had heavy marketing expenses in order to attract the tourist bookings for ski season.  Cash flow must be available for ski season marketing.  Not marketing for ski season was the kiss of death for the primary income period of the year.

 

Marketing for ski season was a major priority.  Postcards were sent to all prior guests inviting them back at special early booking incentive rates.  Full color brochures went out to all travel agents, corporations and ski groups who had inquired or booked in prior years.  Sales letters were mailed to massive data bases and mailing lists.  Rack cards were printed and distributed generously.  Ads were placed in ski magazines; online marketing was used to generate inquiries to send additional materials.  Since marketing was so critical, it was imperative to select a high quality reliable printer such as PrintPlace.com. 

 

Plan your cash flow for maximum efficiency.  Accounts receivable, accounts payable, payment terms, granting credit, spending wisely, inventory, and planning ahead to ensure money is available for marketing are all components of effective cash flow. Poor cash flow management can destroy an otherwise excellent business.