Ebbs and flows

Cash is king!

How many times have we heard this in our business (and personal) life? I've been a corporate treasurer for a $1.5 billion-plus public company; a treasurer for a $4.5 million homeowners association and a treasurer for a $2.5 million non-profit. From time to time in each of these different types of business entities there have been cash-related challenges. Sometimes it's because an acquisition or other project did not work as expected and is causing consternation as to how you'll pay back a bank loan; sometimes the overall economy is causing customers to delay or default on their outstanding invoices; and sometimes it's how can you get enough cash to fund a worthwhile community project. As you can see there are many reasons why an organization, no matter how large or small, may need cash at any particular point in time both good and bad reasons may be causing the need.

Understanding the business plan and strategic direction (that's another topic for another upcoming article) of your business is key to identifying your cash needs. As we all know, even with a business plan, things do not always occur as expected. We must measure and track what is happening and have thoughts about some contingencies if our business projections vary from plan.

So what are some of the common ways to manage cash flow?

1. Prepare a business plan with not only profit and loss (statements, but carry it forward to a cash flow statement. Cash flow may not follow the P&L. For example, you will have had to spend cash to initially open your business, pay for labor and materials to build inventories (if needed), your customers will pay you based on delivery and acceptance of the goods or services, etc. These events typically do not all occur in the same accounting month.

2. Improve receivables collections by requiring a credit application and credit check on all new customers that you extend terms to. Collect a deposit for significant material purchases to fulfill an order. Accept credit card payments. Offer a cash discount for those customers willing to pay early. Identify slow paying customers and have a process for calling, changing their credit terms to cash on delivery or refusing to do business with them and have a policy for sending delinquent accounts to collection.

3. Manage payables by taking full advantage of payment terms by using electronic fund transfers to remain current and pay on the exact due date. Ask for extended terms when negotiating purchases. If you are going to be late let your supplier know what is happening and when they can expect payment or work out a payment plan. Do not select suppliers just because of low price because sometimes more flexible payment terms are better for the cash flow situation that your company may be in.

4. The time to establish a relationship with a bank is not when you need cash the next day. Start at the beginning by selecting a bank that you think can meet your business needs (lockbox, cash management systems, etc.) and find out what their lending policy and practices for future reference. Establish a line of credit before it is needed even if there is a fee to do so. Other methods to improve your cash position include leasing of equipment, machinery, computer, office equipment and furniture leasing instead of purchasing or buying used instead of new.

As you can see there is no single answer as to how a company should manage its cash flow practices. It depends upon the characteristics of the business and industry, your strategic importance with your customer's or supplier's business, your business (and sometimes personal) credit history.

A SCORE mentor is likely to have weathered the ebb and flow of the business cycle and can provide guidance on business planning and cash-flow management.

Ray Lee worked for more than 30 years in corporate accounting and finance for domestic and international manufacturing companies, and has volunteered with SCORE in the five years since his retirement. He also is treasurer for the Terry Lee Wells Nevada Discovery Museum. Contact SCORE at 775-784-4435 or through reno.org, score.org.