Is your business short of cash? The
reasons may not be obvious, but the remedies are clear.
In boom years, the results of haphazard cash management are often
masked by profits and go unnoticed. But in slow years, when margins are thin, managing
cash poorly may spell failure for a business of any size.
If you suddenly have found that your business is short of cash, you
should move quickly to find out why. The answer may not be as obvious as it first appears.
The first place to look for problems is your income statement. It
reflects sales and costs, profit and loss. Unfortunately, many small business make the
mistake of attempting to solve their cash flow problems solely by boosting sales. Building
sales is perfectly appropriate, however, it is not enough.
And the income statement reveals only part of your financial picture.
It doesn't tell you how much money is in the bank, the value of inventory, how much you
owe, or your net worth. That’s the job of the balance sheet which has information
that many small businesses neglect to use properly.
Careful balance sheet examination may reveal uncontrolled receivables
or inventory - both which are drains on cash flow. Without adequate controls over
receivables and inventory, it is entirely possible for a business to make a profit and
still go out of business. Just by managing receivables well in a small business, you can
generate tremendous amounts of cash. In today’s economy, maximizing cash flow is the
name of the game.
To avoid future problems with receivables, companies should establish a
strict policy of how and when to extend credit. In setting policy on credit for new
accounts, require a completed application to determine credit worthiness, and set a strict
credit limit. Check credit references carefully, references and credit must be checked
thoroughly, and sound legal documents are important in case formal collection measures
become necessary.
Another cash drain is excess inventory. Inventory can be tracked by
using a customer service mix analysis to determine inventory needs based on actual sales
and services sold.
The cost of carrying inventory is expensive. This shocks a lot of
people. Once they realize it, they look at inventory differently.
There are a number of ways to maximize cash flow. Many fall under the
heading of improved expense control. Business managers should review expenses carefully
and regularly. Consider whether each activity in which the company is involved is a
benefit to the business. If trimming is necessary, weigh long term as well as short term
effects of the expense cuts you would consider. Most business owners are experts at their
own merchandise but not with everyday business supplies or their costs. So when arranging
for services or supplies, managers should get more than just a couple of bids. They should
also conduct periodic price and service comparisons by long term vendors.
Business Planning
To help you gauge progress and become alert to problems, develop a
business plan for the coming month. Begin with a sales projection, a realistic one based
on the net and gross profit demands of the business. Project and budget expenses.
Establish sales goals in each sales department. Each month review the financial statement
looking for variances between the forecast and actual performance. The following ideas are
recommendations to catch problems and maintain control:
Compensation. Look at salaries, commissions and
pay schedules.
Purchasing. Don’t authorize five or six employees to order
merchandise or supplies. Try to have just one person in charge.
Supplies. Avoid lumping. Break these out separate and review
monthly. Also make employees aware of the cost of supplies.
Advertising. Scrutinize this expense. Make sure your advertising
is reaching your intended market and monitor the results of current promotions.
Records. Above all, maintain good records. You need to know
exactly where you are. Your profit and loss statement should be used as a basis upon which
to make management decisions.
With a clear understanding of your company's financial picture, with
expense controls, a business plan for the coming months ahead, you will be able to catch
problems before it’s too late.
Maintaining control over your business is a matter of scrutinizing
every aspect of the business - and that means looking beyond the bottom line.
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