How To
Plan And Manage Your Cash Flow
By Tom Egelhoff
 Cash. No matter where you
are on the planet, if you are in business, you are going to have
to know how to manage your money. One of the leading causes of
small business failure is poor cash flow planning.
I don't normally write articles on accounting subjects and
I am not an accountant, but this is such a serious subject I
thought I should at least make you aware of the possible pitfalls
that might be awaiting you.
Please consult a qualified accountant or CPA to assist you
with your cash flow planning.
Begin with the basics of your money
Business cash is usually in two places; either it's cash on
hand or in a business checking account at your bank. You need
to have sufficient cash flow to pay bills, in reserve for emergencies
and to put back into the business as investment capital.
I can't stress strongly enough that you put as much money
aside as possible. One major emergency could put you out of business
if you aren't able to overcome it.
For example, if your industry comes under attack with negative
publicity, you may need to retaliate with increased advertising
and marketing strategies that are not included in your current
budget.
How cash flows through your business
Most businesses have a 30 day "operating cycle."
What this means is that over a 30 day period, you will sell products
that you have on hand, some for cash, some on credit, usually
with payment due in 30 days after the sale. At the end of 30
days, depleted inventory is restocked, accounts receivables (credit)
is collected and the cycle starts all over again.
There is cash and potential cash
In addition to cash on hand and cash in banks you also should
have some items that can be converted to cash if necessary. These
are usually referred to as "current assets."
Some examples of current assets might be: Marketable securities
or prepaid expenses, cash and receivables.
Cash Flow Analysis: Your money plan
If the business is to survive, you need a positive cash flow.
The business must take in more than it spends. To accomplish
that goal a plan must be in place.
Before I explain the plan there is some information that must
be assembled. First, your business plan. This should contain
cash flow projections for 3 to 5 years. You will need this to
compare to what is actually happening with your business.
I can't stress enough the constant updating of your business
plan. Ideally it should be done every six months. Most people
pour their heart and soul into it when starting a business and
never look at it again after the business is started. This is
your plan and road map to business success...how can you ignore
it?
Next, all financial statements. These include Profit &
Loss Statement, Income statements, Taxes, Payroll, and any others
your accountant may recommend. The accountant can then help you
prepare your cash flow analysis.
Preparing a Positive Plan
As I mentioned above, you'll certainly want a positive cash
flow. If the cash flow analysis shows a positive...great keep
it up. But, on the other hand, it's negative there are some changes
that need to be made. Here are some ways to increase cash flow.
- Collect Account Receivables:
I recently worked with a company that used to have a delinquent
accounts receivable list that filled a legal sheet of paper.
By being more aggressive in their collections that page is less
than a standard 8x11 sheet and the business is in better financial
shape.
- Review and Restrict Credit:
American Express has made a business out of advertising how difficult
it is to acquire their card. Issuing credit is a good way to
build a business, but only if those given the credit pay on time.
Extend credit to loyal customers who earn the privilege.
- Pricing: Are you asking
too much or too little? Pricing isn't about the price of a product.
Huh? Pricing is a matter of perception by the buyer. If I say
CD player, a price jumps into your head. The same with Lexus
or Neon. Any customer will pay any price for a product as long
as they are convinced that the value is there. You can raise
a price if you can raise the perceived value to the customer.
- Short Term Loans: Try
to establish a "line of credit" with your bank. That
way, if an emergency arises, you can deal with it immediately.
- Increase sales: That's
easy..Right? Just go out and sell more. Not that easy is it?
But, it can be done. The thing to keep in mind is that more sales
are probably done on credit than cash. So, increased sales increases
accounts receivable and not cash. Be very careful here. If you
do a promotion or sale to increase revenue, keep a close watch
on receivables. A substantial increase in sales will deplete
inventory that must be replenished with accounts receivables
money. If these are not collected on time your cash on hand or
cash in banks will have to be depleted to cover costs.
Other things to consider
Perhaps a definition of "cash on hand" is in order.
Does that mean you must keep every available nickel and dime
in box in the back room? No. Keep a small amount as needed but
put the bulk of the money to work...earning interest. This will
be your "Cash Reserve." Invest the money in an accessible,
interest bearing, low-risk account.
Since investment vehicles change so rapidly, I'm not going
to recommend anything here. Check with your financial planner
and accountant to determine the best place to invest during your
current circumstances.
Do as much as you can yourself
As I mentioned earlier, I'm not an accountant nor do I wish
to be one. But, I do my own books for the most part. I need to
know and understand how my company operates. Like most of you
I have a vision of where I want smalltownmarketing.com to go.
Currently I am a long way from where I see the business in the
future. But I have to know where I am now before I can work toward
the goals I have set.
Most businesses can afford a basic computer and accounting
software is relatively inexpensive. Have your accountant set
up the basic categories of your business and start preparing
and analyzing your own reports. Many systems will allow you to
test a "what if" scenario. What would happen if I did
this?
The last word on cash flow
If you are a small or home based business it is well worth
the money to sit down with an accountant and have him set up
a simple accounting system for you.
My first system was a series of envelopes. Seventeen in all
as I remember. There were things like; Accounts Payable, Accounts
Receivable, Cost of Sales, Gas and Auto, Office Expenses, Inventory,
Advertising and so on.
This procedure isn't expensive but can save big money in the
long run. As your business grows, you are going to have to make
some hard decisions. Some of them may be risky and costly. Knowing
the financial position may not make the decision less risky but
may make it easier to make.
For more help, buy my book,
or visit the Small Business Administration website at:
http: sbaonline.sba.gov/
You can also request a free copy of "The Resource
Directory for Small Business Management, " a listing
of for-sale publications and video tapes from your local SBA
office.
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This article may be reproduced for your non-profit
group or organization provided it is not altered in any way and
the following is attached:
©1998 - 2004 Eagle Marketing PO Box 271 Bozeman, MT
59771-0271
http://www.smalltownmarketing.com - (406) 585-0219 - Toll FREE
(888) 550-6100
email: tommail@smalltownmarketing.com
Based in Bozeman, MT, Tom Egelhoff is the author of How To Market, Advertise & Promote Your
Business Or Service In A Small Town, and The
Small Town Advertising Handbook: How To Say More And Spend Less.
He is also a seminar and workshop presenter
and trainer. He may be reached at 888-550-6100 or PO Box
271 Bozeman, MT 59771-0271
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