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How to Keep Enough Business Cash Flow


By Mark Neighbors and Andrew J. Usery

In the daily grind of running a business, owners and managers have a wealth of competing responsibilities, not the least of which is ensuring that the business is generating sufficient cash flows. While there is an array of strategies aimed at maximizing cash flows, many are straightforward and relatively easy to implement with a little discipline and tact.

Here are some basic strategies to enhance or keep your business' cash flows on track:

* Accounts receivable. Make sure that every customer is complying with the stated credit terms and that those terms themselves are in line with the norms of your industry. Unnecessarily slow payments put your business in a perilous situation. Delayed collections can cost a business significantly in several ways, including lost time-value-of-money, unnecessary borrowing/interest incurred, administrative labor reconciling accounts and chasing collections, etc.

Develop a billing system that timely, accurately and efficiently processes your revenues, and don't be afraid to push for payment as early as is practical. Also, you may find that you can leverage your long-standing customer relationships to offer discount terms during cyclically poor cash flow periods.

* Accounts payable.Review your credit terms with suppliers and make sure that those terms themselves are in line with the norms of your industry. If your business pays suppliers before it has to, it has unnecessarily put itself at a disadvantage.

Develop a payables system that timely, accurately, and efficiently processes your purchases, and don't be afraid to defer paying for those purchases as far as the credit terms allow. Also, consider negotiating more favorable terms from long-standing suppliers during cyclically poor cash flow periods.

* Examine your banking relationships and services. If your business does not already have a revolving line of credit with a competitive interest rate, give your banker a call. If your customers have a solid track record of paying their invoices within industry norms, leverage a line of credit to borrow against your outstanding receivables. The percentage of the receivables against which your business can borrow might be 70 percent or higher, dependent on industry norms and your business' risk profile. Strategically borrow under a line of credit to bridge short-term cash shortfalls.

Review your utilization of strategic banking services, such as lock box collection, which enables your bank to receive payments directly from your customers, and accounts receivable application/recording automation, which enables your business to receive a data report on those lock box collections that management can automatically upload to your system, thereby reducing administrative time of check handling, data entry, deposit preparation, and visits to the bank.

* Inventory. Cash that might otherwise flow back into your business can remain trapped in idle or slow-moving inventory. A manufacturer, for example, should examine inventories of materials, work-in-progress, finished goods and supplies, looking for items that are taking too long to turn over. It may be time to discount slow-moving or obsolete items to generate sales.

Or, it may be wise to scrap certain items and declare losses that would result in a lower tax liability and, hence, more cash available to the business. Alternatively, this review of inventory may also demonstrate that your business can reduce its ongoing inventory levels of some items, thereby reducing the cash requirements.

* Review your strategies for staffing and other technology. Does your current level of business match the size of your current staff? Do advances in software tools provide opportunities for your company to better utilize its human resources to meet its goals?

For example, consider accounts payable automation, which creates electronic records for purchase orders, packing lists, and invoices from vendors, thereby making it easier and more efficient to confirm that what your business ordered is what it received and for what the vendor billed. Could your business redeploy certain staff to more value-add activities if they were less burdened by tedious administrative tasks?

* Pricing and product mix. For companies selling multiple products, a thorough analysis of gross and net margins can lead to decisions that produce higher profitability and increased cash flow. Sell more of what nets your business the greatest benefit and what results in customer payments the quickest.

While managing the demands of each business day, business owners and managers may sometimes miss opportunities to capitalize on cash flow opportunities, discipline in executing some basic strategies such as those above can make your business better.

Mark Neighbors is a partner in LBMC's Audit and Advisory practice in Chattanooga. Contact him at or 423-755-0762. Andrew Usery is a senior manager in the Audit & Advisory practice. Contact him at or 615-309-2317.

How to Keep Enough Business Cash Flow



Chattanooga Times Free Press