Wednesday, June 25, 2014

Improving your cash flow: Part V

We have discussed ways to improve your cash flow: managing accounts receivable, controlling inventory, watching accounts payable and thinking about debt services.  Today we will discuss the impact that owner draws can have on cash flow.

Many small businesses are set up as sole proprietorship's and/or single member LLC's.  This type of entity requires the owner to get paid via owner or member draws instead of paychecks.  A paycheck would show up as an expense on the Profit & Loss while a member/owner draw shows up as a reduction in equity on the Balance Sheet.  Having the draw show up on the Balance Sheet rather than the Profit & Loss confuses many people as many focus solely on the Profit & Loss when judging the success of the business.  They will see a profit for the period they are analyzing, but no money in the bank and wonder why.  One factor may be those owner draws.

We have seen cases where the business is successful enough to support itself, but not enough to support the owner and his/her family. This may require changes on a personal level if the business is unable to improve it's cash flow.  Unfortunately, we have seen cases where the business was a success on a small level, but not enough to support the owner's lifestyle which resulted in the failure of the business.

We will finish up next week with a discussion of taxes and how they can impact cash flow.

Monday, June 16, 2014

Improving your cash flow: Part IV

We have talked about how to improve your business' cash flow by being aware of the components (accounts receivable, inventory, accounts payable) and how they impact the amount of money available to a company.  This week we will discuss debt service and how that can effect cash flow.

Debt service means the payments you make on loans, both the interest portion and the principal, if applicable.  The interest portion appears on the profit and loss statement, but the portion reducing the debt (principal) shows up on the balance sheet as a small loan balance.  As such, if your budget is solely a P&L based budget, you may not have the full loan payments reflected.  This can have a major impact on the business if you have significant debt.  Another aspect of debt service is the need to pay down or rest a line of credit.  A lender will want a borrower to occasionally pay the loan down to zero or close to it.  A line of credit is designed to help cash flow in cases where large purchases are needed (raw materials or other types of inventory) and the length of time before the items are sold and the proceeds collected is significant enough to cause the bank balance to dip too low.  The idea is to draw on the line (transfer the money into checking) to pay for the purchases and then to pay it back when the sales proceeds are collected.  Too often, businesses do not keep in mind the need to pay the line back down.  This not only causes concern by the lender, it can also cause problems down the road for the business as there may not be sufficient money left to borrow on the line for the next large purchases.

Debt is necessary for many business owners, but properly managing it is an important part of managing cash flow.  Next week we will talk about owner's draws and how they effect cash flow.

Wednesday, June 11, 2014

Improving your cash flow: Part III

We are discussing how managing your cash flow is crucial to the success of a business. In this discussion, we have dealt with accounts receivable management and inventory control.  This week, we will talk about the impact accounts payable can have on cash flow.

One of the major keys to cash flow is to insure that the terms of your accounts receivable mirror the terms of your accounts payable.  You do not want to be paying your vendors faster than you are receiving payment from your customers unless you have a line of credit to ease the timing difference.  Developing a good relationship with key suppliers can be very helpful in this process. Negotiating for extended terms can be done if you are a valued customer.  Keeping track of the business you do with vendors can be an asset when conducting these negotiations.

If you have the chance to get an early payment discount from a vendor, be careful to consider all your cash flow needs before accepting.  The discount is helpful only if you still have enough money to pay rent or make payroll.


Tuesday, June 3, 2014

Improving your cash flow: Part II

Last time we talked about improving cash flow by controlling accounts receivable so this week we will tackle inventory control.

The goal with inventory management is to maintain a sufficient supply of inventory to satisfy customer demand without tying up company cash flow by needlessly storing excess product.  This can only be done effectively by tracking metrics such as on-time delivery rates for your vendors/suppliers and inventory turnover rates.  Businesses should be aware of how fast products are being sold and how reliable their suppliers are.  The more reliable the supplier, the less excess inventory you need to have on hand as you can be comfortable that the product will arrive when you need it.

Another facet of inventory management is determining the proper number and composition of your inventory.  You want enough product on the shelves to be interesting to customers, but not so much that is overwhelms them.  You also don't want your cash flow tied up in merchandise that isn't selling so you need to track inventory turnover rates to determine what is selling and what is not.  Consider discounting the slow moving items regularly to get them off your shelves and the money into your bank.

Maintaining good relationships with your suppliers is an additional way to improve inventory management.  You want to insure that you have the lowest lead times, smallest minimum order quantities and largest volume discounts you can get.  Don't be afraid to negotiate for this things!  Consider implementing a supplier managed inventory program or try to get consignment stocking (supplier owns the inventory and stores it at your business).  Not all suppliers are capable or willing to participate in programs like this, but you don't know if you don't ask.

Remember that every dollar of inventory sitting on a shelf is a dollar not available for spending on payroll, owner draws or advertising, etc.!  Next time, we will talk about accounts payable and their impact on cash flow.