Thursday, May 22, 2014

Improving your cash flow: part I

There is a popular saying in business: Cash is King.  Having adequate cash flow is crucial and many a business fails due to a lack of cash.  What drives cash flow?  Accounts receivable, inventory, accounts payable and debt payments are the main drivers.  We will talk about accounts receivable management this week and address the others in subsequent weeks.

Managing accounts receivable includes setting the terms you offer your clients/customers as well as enforcing those terms.  You should consider what terms your suppliers give you when determining the length of time you offer your customers.  If you have to pay for your materials in 30 days, you should think twice about offering your clients 60 days.  Of course, industry standards should be considered as well.

Once you have set your terms, you need to make sure customers are aware of them.  If you sign contracts, the terms need to be in the contract.  They should also be on all of your invoices and sales receipts.  It is also good to mention them verbally to new customers to make sure they really understand how soon you will be expecting payment.

Finally, you need to enforce your terms.  There are certain businesses who won't pay until you call them.  It is not that they aren't aware of your terms, it is just that they are short on cash themselves so they only pay the vendors who call and ask for payment.  If you set terms of 15 days, you should be calling or emailing on day 16 if you have not received payment. It doesn't have to be a contentious exchange.  I find that the simple "I haven't received your check yet.  Do you think the mail has lost it?" works quite well.  You usually get a quick apology as they forgot to mail the check.  Sometimes, they really did forget and sometimes they were waiting for you to ask.  If they promise to mail it out today, then make note and follow up again if you don't receive the payment as expected.

If you continue to experience delays or difficulties collecting, you should consider whether you want to continue doing business with the customer.  Don't hesitate to go to small claims court or use other legal methods to collect if the outstanding bill is large enough.

No one enjoys making collection calls, but it is part of doing business.  Collecting accounts receivable on time is very important to the success of a business.  Next week, we discuss inventory management.

Thursday, May 15, 2014

Do I need to have accounting skills?

I love accounting which is a good thing since it is my chosen profession!  Many people do not and many business owners resist gaining any knowledge of the subject.  We often speculate why so many small business owners do not know how to read financial statements and do not want to learn how.  I suspect some subscribe to the ignorance is bliss theory.  No one is truly ignorant and I think many owners suffer sleepless nights because they know something is wrong even though they are trying to remain ignorant.

I read an interesting article in the NY Times recently about how a lack of skills in accounting is hurting society in general.  I have included the link below and it make a compelling argument for educating society and how other countries have done so successfully for hundreds of years.  Some high schools require some financial education-our local school district requires a class called Personal Financial Management.  This is a good start but more is needed.  The University of Wisconsin School of Business requires all students to take a minimum of two accounting classes regardless of the major and several other schools within the University require some accounting classes in order to graduate as well.  DePauw University is completely overhauling its Music Conservatory using an entrepreneurial base which requires two accounting classes for all music majors (much to many students dismay!).  No Accounting Skills?

We encourage all of our clients to gain as much of an understanding of their financials as possible.  They have us and their accounting software programs to handle the nitty gritty accounting, but they still need to understand basic concepts like profit margins and cash flow.  What do you think about requiring all citizens to have a better accounting education?

Tuesday, May 6, 2014

Turning your business around Part IV: Do you need outside help?

If your business has not achieved the level of success you were hoping for, you may turn to outside help for the answers.  A consultant, coach or advisor may bring the expertise you need to improve your operations, your procedures or your bottom line.  Before you sign any contracts, a few things to consider.

First, you will want to make sure you have found the right person or business to help you.  Get references to make sure there is a track record of success in assisting business turnarounds.  You will also want to verify that they have worked with similar types of businesses or similar problems/issues.

Second, make sure you understand what the full cost of the service will be.  A contract is a must so that everything is spelled out in terms of cost and timing.

Finally, you must be committed to making changes.  The consultant can give you all the answers you need to turn things around, but if you aren't willing to implement the changes, you are wasting your money.  It is hard for most entrepreneurs to let go of the reins, but they need to from time to time!