Small Business Bookkeeping – Keys to Cash Management

Oct 3, 2011   //   by Gina Lynd   //   Small Business Bookkeeping, The Shoe Box Blog  //  No Comments
Keys to Cash Management 

Cash is king, and many small businesses are in danger of running out in today’s slumping economy. Business owners continue to struggle to find cash flow strategies that will help them survive the recession. Recent research suggests companies both large and small are still struggling to stay financially viable. The stakes are high and decisions critical, so what can you do to keep your business afloat?

Manage Risk

Managing accounts receivables is one of the key strategies for keeping the cash flowing. What can you do to speed up customer payments? More than you might think. According to Pam Krank, president of credit risk and receivables management firm The Credit Department Inc. in West St. Paul, Minnesota, the most important step is to negotiate favorable terms up front in the sales process. Don’t be afraid to ask for money up front in the form of a deposit or a retainer. Enforce your terms by immediately calling customers when invoices are past due. What should you do if a customer is experiencing cash flow problems? One option is to create formal payment notes with interest and agree to do all future business on a cash basis.

Understand Cash Needs

Cash flow projections are an important tool in understanding the cash flow needs of the business. Some recommendations to improve cash flow management:

  1. Create cash-flow projections with best-case and worst-case scenarios.
  2. Focus on understanding short-term cash needs.
  3. Ensure accurate estimates of income taxes.
  4. Keep sufficient cash reserves in the business.
  5. Understand line of credit terms and conditions including compliance ratios.
  6. Establish a line of credit when you don’t need it.

Understanding your financial position is a key component in having a successful business and managing cash flow. Determine the company’s break-even point to better understand how long you can stay in business and to proactively identify financing needs. 

Conserve Cash

Conserving cash is a key strategy for weathering the recession. Many businesses are operating with a cost structure that can’t be supported by soft revenues.

Business owners need to act quickly and dramatically to adjust their cost structure to match revenue. They need to be willing to make difficult decisions, such as reducing personnel, to ensure the business remains viable. Review expenses with a fine tooth comb; everything has to be on the table. Ask vendors for discounts or request an extension of terms. Lay off employees or freeze wages, if necessary, based on projections. Work with your financial advisors to help you remove emotion from the process and to be more objective when slashing expenses.

Prevention is often said to be the best medicine, and it holds true for cash flow as well. Strong financial controls, informed management of risk, decisive leadership, and open communication with financial advisors can help you to reduce the risk of cash-flow problems. Never lose sight of your cash flow. Review a statement of cash flow report monthly, if not weekly, to understand your financial position. Don’t sell your way out of this economy—cash flow your way out.

Cash Flow Tips:

  1. Act quickly and aggressively to conserve cash by reducing expenses.
  2. Shift resources to profitable areas, and discontinue unsuccessful products or services.
  3. Negotiate favorable payment terms with customers before the sale.
  4. Ask for money up front in the form of a retainer or deposit.
  5. Research the credit history and financial health of customers before the sale.
  6. Don’t stock pile inventory without sales.
  7. Provide timely and accurate financial reports to your bank.
  8. Understand the terms and conditions of your line of credit.
  9. Create cash-flow projections for best-case and worst-case scenarios.
  10. Keep sufficient cash reserves in the business.
©2011 Wells Fargo Bank, N.A. All rights reserved.

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