Managing Cash Flow Basics

Making sales is vital for a company's existence, but managing cash flow properly is the true test of how well a company operates.

Here is an excellent overview of cash flow for a company coming from the Agricultural Extension Service of the University of Tennessee. It was published in 1999 by Rob Holland, Assistant Extension Specialist, Agricultural Development Center and is taken from this document titled Understanding, Planning, and Managing Cash Flow.

Cash flow is primarily the difference between cash coming into the business and cash going out of the business during a given period.

Here are ways to manage cash flow:

1. Decrease the amount of money owed to you-- get customers to pay their bills
2. Cut out excess overhead expenditures
3. Keep a close eye on inventory
4. Don't overpay taxes
5. Review owner's compensation - secondary income may be valuable to the success of many small business ventures in the early years
6. Maintain tight reigns on billing and collections
7. Consciously structure the payment of bills - pay bills closer to the deadline but do not incur late fees
8. Consider biweekly or monthly paychecks
9. Update company procedures to make process more efficient and cost-effective
10. Plan ahead - he advises using cash saving activities such as renting instead of buying or purchasing used equipment versus new equipment, finding cash paying customers and quick paying customers versus giving credit and late payers.
11. Develop a good record keeping system

Easy to use cash flow tool

For small business owners who can't find time to set up a solid accounting system just yet, then get started tracking cash flow on paper the old fashioned way with "Small Business Bookkeeping System Simplified."

The bookkeeping book is easy to use and understand for non-bookkeepers and accountants. On two pages it has a weekly expense and income record system to track:

• General Expenses
• Inventory Expenses
• Equipment / Property Expenses
• Payroll Expenses
• Weekly Income or Returns
• Income totals and Expense Totals

The book, and method, may seem primitive compared to programs like Quickbooks, Peachtree, etc. but it's a great tool and way to get started understanding how to track simple expenses. Plus, the only tool needed to operate it is a pen or pencil.

I picked up a 2003 copy from my local library on the shelf of business books. A current edition is available at Novapublishing.com for $ 29.95.

It's a simple way to stay organized, track expenses across different categories and hand to a bookkeeper who winds up tracking expenses in more detail in Quickbooks or some other accounting system.

Click here to read the Cash Flow Tips for Companies round up for last week.

Cash flow management overview

Cash flow management is a vital function for any business or organization having to pay bills, employees, and vendors. Having a concise overview of cash flow, how cash functions, and the needs for cash flow management may escape many business owners.

I highly recommend reading this article and re-reading this article "Cash Flow-In and Out" by Nancy Blondin, CPA, writing on the Website "Tennessee Society of Certified Public Accountants".

Here is an excerpt on managing cash flow:

"Cash is needed to acquire supplies, equipment and other assets that a business requires to accomplish its business purpose. Cash is needed to pay wages, operating expenses, taxes, interest and principal to creditors, and dividends to stockholders. It allows management to carry on its business. A thorough understanding of cash and how it flows in and out of an organization will allow you to answer the following questions:

1. How much cash does my business have?
2. How much cash does my business need to operate, and when is it needed?
3. Where does my business receive its cash, and spend its cash?
4. How do my income and expenses affect the amount of cash I need to expand my business?

If these questions can be answered, you are truly managing your cash flow."

The article covers:

• Cash Needs and Policies
  
• Financial Statements
  
• Net Income vs. Net Cash Flow
  
• Cash vs.Liquidity
  
• Cash Budget
  
• Techniques
  

Read portions of the article on cash flow, bookmark it, and read it again.

How a start up business managed cash flow

A business in Southern California had to carefully manage cash flow during the first three years as it started up and sold products to retail stores in the United States and eventually Canada.

The company didn’t pay cash or incur debt to purchase and stockpile inventory in the start up phase.

“When we started, we started with very little money,” said Jason Carr, co-founder of Softline Home Fashions with brother Rodney Carr.

Softline Home Fashions, located in Gardena, just south of Los Angeles, imports quality polyester fabrics and sells to independent retail outlets and mass merchandisers.

He told me how they started generating their initial cash flow: “Some guy would have a stock lot and we’d go and re-sell it to generate capital. We started taking trips to China to buy more of a regular running line.

“We used factors. People take a certain percentage of the invoice and they collect on receiveables paid to them.”

Financing the start up for Softline Home Fashions required a careful strategy of showing samples to the retail outlets, determining which fabrics were going to sell, and then requesting the fabrics from suppliers in China and Indonesia. The product was then shipped and sales made to the retail outlets and then the suppliers were paid.

Jason Carr, co-founder of Softline with brother and business partner Rodney Carr, told me they’re grateful to the suppliers who allowed flexible financing arrangements.

Softline Home Fashions’ today has a large warehouse with 75 employees at its Gardena, California operations with immediate shipments to customers. The company also has offices in Atlanta, New York and operations in Canada.

Click here to read more on how Softline got started shortly after the tragedy of 9/11 in 2001.

Financing for a start-up business

Ensuring cash flow for a start-up business is one of the main reasons to arrange initial financing.

The amount of financing, and the type of financing, needed depends on the overhead and complexity of the business model.

Here are tips for financing a start-up:

• List all expenses
• Project dates for initial revenue
• Invest a small portion of personal funds
• Fund new business operations through equity and debt
• Check city, county, and state resources for funding guidance and low cost loans

Click here to read the full article on creating a financing recommendation for business

Do not underestimate start-up expenses and do not overestimate start-up income.

Businesses must plan for cash flow

This is the second post with Seth David on the single most common accounting mistake small businesses make. Seth says companies simply don't plan.

Many businesses fail to do this, and they HAVE TO!

The Business Visionary

They know they can go out and make money – you get a visionary with a great idea. Maybe he has the start-up capital and the marketing skills. So he goes at it with all of the passion needed to start it off.

Then as time goes on he starts to wonder why there isn’t more money in the bank. Then he finds himself (or she finds herself) struggling to make payroll.

We know this is normal for a new business and some might even say a requirement for every entrepreneur to experience. At some point the visionary finds me and asks me to help them understand where all the money is going.

What the Business Visionary Overlooked

Invariably what I find broken down simply is that they failed to plan ahead. They failed to sit down and add up their expenses ahead of time to see at a minimum what they needed to bring in to pay for everything and still make a profit.

They forgot to consider that the startup capital came with a payback requirement and interest. This affects cash flow. There are many factors that come into play that we don’t/can’t anticipate – so it is critical to have a plan (forecast) and to review it every single month.

Financial Basics

I have a very robust spreadsheet that I’ve created that lets me export my financial information from QuickBooks each month so I can look at my income, expense, and cash flow forecasts. I have both my corporate and my personal tied in because the money flows that way- from my business to my personal and then out to the bank to pay my mortgage.

Click here to read the first post on why businesses need to plan for basic financial information

Why basic financial planning is essential for business cash flow

Basic accounting and bookkeeping is essential for all businesses - but especially small businesses.

I asked Seth David of Nerd Enterprises "what is the number one accounting and cash flow mistake that all small businesses make?"

The biggest mistake I see businesses make is that they don’t plan. When I moved to California I was living in a half way house. Before I took a job, I had to add up what my expenses were going to be each month so that I could see what I needed to earn at a minimum to live.

It wasn’t much, but if I just went and took a job without knowing, I could have found myself in a situation where I wasn’t making enough money to pay my bills. So when I sat down in the first job interview I already knew what I needed bare minimum. I padded the amount in case I may have missed something, and in all likelihood I would need to add expenses along the way.

Of course I wanted to further pad that so that’s where the negotiating comes in. When I am looking at jobs I know I need to look at jobs that are paying at least as much as I need at a minimum.

Now let’s say I find that for what I do, jobs simply aren’t paying that much. I have to go back to my budget and adjust the income based on what I think I can get. From there I look at the net to see if I am short and if so by how much.

If I am short I have to make adjustments somewhere, starting with things I don’t really need and then seeing if I can live with “less” of the things I do need.

Business bookkeeping using Quickbooks

A business owner who pays attention to the books, and even learns bookkeeping, has more control over the finances than an owner who delegates the task and then doesn't ask the bookkeeper for details.

Learning bookkeeping in a program like Quickbooks can help a business owner ask intelligent questions.

Knowing bookkeeping basics gives an owner a greater financial understanding of expenses, income and profitability. It serves in making strategic decisions.

Click here to inquire on Quickbooks and applicable discounts.

So where are bookkeepers found? Certainly through a local chamber of commerce and business networking groups.

Hiring a bookkeeper?

Ask if they have certification from an organization like the American Institute of Professional Bookkeepers http://www.aipb.org. There are 30,000 members. The mission of the organization is "to keep bookkeepers up to date on changes in bookkeeping, accounting and tax; answer bookkeepers' everyday bookkeeping and accounting questions; and certify bookkeepers who meet high, national standards."

There's also the National Association of Certified Public Bookkeepers, www.napcb.org, that has a mission "to protect the public interest by helping to ensure that only qualified individuals provide public bookkeeping services and assure the public that members are trusted and competent bookkeepers."

The NACPB has billing rates at $ 60 per hour and up.

Bookkeeping is a strategic expense for any business at any stage. For most small businesses, a bookkeeper is normally needed three hours to five hours weekly once records are in order.

A business owner who takes the time to learn Quickbooks basics can get records in order and then hand the operation over to a qualified bookkeeper.

Keeping Records and Financial Statements

Control business finances with a thorough record keeping and organizing financial statements. Here is a good cash flow tip from the book Starting Your Business.

Author Peter Hingston writes:

"keep receipts and invoices for everything you buy in connection with your business . . . the purpose of keeping invoices is so that you have proof of purchase and can justify all your expenses to your accountant and any IRS agent.

"Write the last three digits of the check number boldly in red ink on an outside corner of the invoice so that it can be easily cross-referred to your check book and financial statements."

Separate invoices in to paid and unpaid statements.

For most small businesses, hiring a bookkeeper as an independent contractor is a wise use of cash flow. For companies with fewer than 15 employees, most bookkeepers may only need to work on a system for 5 to 7 hours per week to maintain it.

Also read Reduce bills to increase cash flow.

Accounting and bookkeeping service in Los Angeles

An accounting and bookkeeping service for companies in Los Angeles is available through NerdEnterprises located in Burbank.

One of the reasons I chose to interview NerdEnterprises, operated by Seth David, is because of the tremendous value-added information offered publicly and free-of-charge. This is not a sponsored post but I feel the company offers fair and valuable services.

What type of companies (what industry and what size) do you serve?
We serve a very wide range. At the beginning there was a high concentration of Real Estate clients – a property management company, a landlord with several rental properties, and a company that did rehabs.

I also fell into several marketing companies just by chance. More recently for no reason I can think of I seem to have attracted several clients in the jewelry business.

Along the way we have worked with companies ranging from entertainment, film production, video editing, mortgage brokerage, retail, mobile pet grooming, plumbing and general contractors, construction companies, and online as well as affiliate marketing businesses. We worked with an architect firm for a brief period of time.

What I have found is that when you really understand “accounting” it really doesn’t matter from one business type to the next. The dynamics may change but the generic functions are the same.

Money comes in, and money goes out and it’s a matter of understanding where the money is coming from, where it is going and really planning and projecting both of those so you can grow your business. Outside of that, the descriptions, account names, customers, and vendor names change, but that’s about it. When you’ve become an expert on a company that sells inventory you should be able to manage any company that sells inventory no matter what that inventory is.

In terms of size the typical client ranges from $1,000,000 to $10,000,000. We have built some complex financial models for companies at the high end of the range. Beyond that, at these levels they really need to have a full time CFO (which is the gap I fill) and they have to have a full time bookkeeper (whom we have often hired and trained for them).

At the lower end of the range we offer the option for companies to outsource their accounting and bookkeeping function to save on overhead.

Reduce Bills to Increase Cash Flow

Reduce bills to increase cash flow came to me as I spoke with a business consultant who told me she saved a company $ 12,000 a year by reviewing the credit card processing fees at their bank and negotiating lower fees.

Reducing the fees associated with the cost of doing business is possible.

Eva Marie Beisner, of On the Books in the Black, told me that was one of many case studies where she has identified ways to help businesses save money. Eva works with businesses in the Riverside-San Bernardino area of Southern California -- the Inland Empire.

She'll review processes and set benchmarks for performance as well.

In the day-to-day running of operations, it never seems convenient to take time to pay bills or let alone study the statements to find what might seem like small savings.

Hiring a company to come in and review areas of possible savings may make sense.

Some service companies will do so on a performance-only basis. It's a win-win for both parties involved.

In Eva Marie's case, she'll meet with a company a few different times at no charge prior to performing any service or charging a fee in order to understand their greatest need. In her assessment, if she can't provide the help they're looking for then she'll "make a friend" and not charge for her initial consultations.

Her projects will include spending time getting the financial statements in order or hiring and training the staff necessary to properly do the bookkeeping or accounting.

A cash flow tip for a company who suspects their fees may be too high is looking on the calendar when the utility bills or other statements arrive and then taking a few hours to review the statements.

Finding a way to save even $ 200 or $ 300 a month could equal the cost of a small project brought in the door.

For companies wanting to learn more about their internal needs, call Eva Marie Beisner at 909-282-0925 or visit www.onthebooksintheblack.com.

Positive Cash Flow in a Slow Economy

Building a business in a slow economy isn't easy but Robert Barbera of Barbera Properties has achieved a 1% vacancy rate two months in a row.

People in Pasadena, Arcadia and other nearby cities have stayed in any one of 26 apartment buildings for one major reason: value.

There are over 500 units that are continually maintained and tenants have an open line of communication with the building manager.

Barbera Properties also made the decision not to raise rents as tenants' leases came up for renewal.

He made a strategic decision between trying to gain more revenue with increased income or reduce the number of vacancies. He chose to reduce the number of vacancies.

The Barbera Properties staff also started an incentive program of offering $ 200 to split between apartment applicants and those who referred them. A local business owner or friend of an applicant in Pasadena, South Pasadena or surrounding areas can refer someone to rent an apartment.

When the application is submitted and approved, then the referral source receives $ 100 and the applicant receives $ 100 as a bonus.

Robert Barbera and the staff have also chosen their target area to receive business: middle income professionals and families who want a comfortable apartment to rent in Pasadena, Monrovia, Temple City and neighboring cities.

"We also treat our tenants as partners," said Robert Barbera. "They're more than just a source of income. We want them to be happy."

The buildings don't have the glitz and prestige of newer developments like the Paseo Colorado or the Trio, nor do they have the expense, but the grounds are well-maintained and operated professionally.

Business owners in all industries can learn a valuable lesson from the operation of Barbera Properties: provide value to customers, stay in communication with them, respond to their inquiries in a timely manner, and treat them as valued partners.

Cash Flow This Quarter

The last quarter of 2008 is here. How is your cash flow?
And are you organized to increase it?

Here is how I handle and project my cash flow.

I've just launched Right Touch Marketing & Media to service the marketing and communication needs of companies -- from individuals to middle managers in corporations.

Positive cash flow is a challenge for all businesses, but it is especially criticial when starting a service company like mine.

Think in Categories

#1 Leads . . . how many leads do you have available? Are they warm leads or cold leads?

#2 Lead Meetings . . . how many lead meetings do you have set up in October, November and December?

#3 Proposals . . . how many proposals do you have going out the door? How many do you expect to go out the door during this quarter?

#4 Sales . . . how many sales do you expect to close during this quarter?

#5 Projects . . . is your company handling client projects effectively? This is the reason you're in business. Jobs that are done well can result in more leads through word-of-mouth referrals.

#6 Customer relations . . . this overlaps with the above. But staying in touch with customers/clients

#7 Evaluation . . . schedule a time to evaluate your company's overall operation -- from marketing to technical needs to customer relations.

There it is! That's all!

Certainly, implementation is tough. So go back and see what are your trouble spots? Do you have "power partners" who can help you -- whether from within or external?

For me, thinking in categories, or a complete cycle, can reduce the inner tension and worries and show me where I need to take action.

Here's to a successful October and a successful last quarter of 2008.

The banking crisis and back to basics

Trying to think about what to write as I've followed the banking-mortgage-money crisis is like trying to figure out where to jump on to a merry-go-round that's in full motion.

But for individuals it comes back to controlling what you can control: your career prospects, saving instead of spending all your money, and getting rid of high interest rate debt like credit cards.

Is the economy "melting down" as it appears by the headlines? Think of this: companies still produce goods and services, families still need houses and apartments to rent or own, and 93% or so of Americans are employed.

Fiscal responsibility isn't just a political term but it's a societal truth that all of us must grasp and embrace. In past years, politicians have urged Americans to spend in order to avoid recessions. That has helped lead to problems of personal debt. Instead, families should be urged to save to build wealth and operate from a position of strength.

Take action. I know for me, when I take action then I don't feel like a helpless victim. Here is an I wrote which you may find helpful on just that topic.

Stick with the basics while you read up on the financial whirlwind happening around us. Focus on what you can control in your financial life not what you can't control.

The Cost of Crisis Management

Crisis management -- I've been thinking how there must be a cost to crisis management.

Years ago, while working at one organization needing to raise money, consultants would march through and everyone tried to solve the financial cash flow crunch with immediate, short-term solutions.

Understandable.

But mid-term to longer-term planning was set on the shelf.

While working with small but growing businesses crisis management strikes when there's a problem clearly identifying a service provided. It's tempting, especially for creative services firms, to try and provide a service that you normally don't provide.

Have there been studies done about the cost of crisis management and not being able to correct a course of action?

Is there a way to avoid crisis management?

Here are my thoughts.

Take a long term view of where your company should be.

Or, for families, take a long term view of where you want your family finances to be.

Write it down on paper. Then work backward to fill in the missing pieces.

It's like asking assessment questions which I write about on
http://marketingtips-marketinghelp.blogspot.com/.

I'll write more specifically about avoiding crisis management in the next post, too.

Free Business Forms and Documents

Here’s a way to conserve cash flow by using free business forms and documents.

Starting a business and need business forms and documents? Or managing a project and you need project management documents? You can get free forms and documents from legal and business to creative at http://www.docstoc.com/.

Just like free videos are uploaded to YouTube, downloadable documents are available at docstoc.com. One document I just came across is a free cash flow business valuation model.

Docstoc community manager, Kathrine Ahn, told me they’re “focusing on just being the number 1 resource online for professional content.”

Documents are available for a number of categories ranging from business to entertainment. Users create profiles and then upload documents and can track different key stats including who has viewed your documents and how many times they’ve been downloaded.

It’s one way for professionals and businesses to market their knowledge and provide value to prospective clients and customers.

A new feature just added allows business plans to be securely uploaded and shared privately with investors. Ever tried attaching a large document with Yahoo? Docstoc has a one click application allowing users to email files without attaching documents.

Docstoc’s capital comes from investors including the co-founders/investors in MySpace and LowerMyBills.

While surfing around on information for the company, there was this article posted on the lifecycle of a start-up written by Jason Nazar, co-founder of docstoc.
Raising Money for a Startup.

Docstoc is another example of quality information available for free online. I’m a strong proponent of digging for quality, free material before pulling out the credit card or cash.

Spend Money to Build Value in Business

Building Value in a Business

Money spent strategically builds a brand name over a long period of time. Not spending money wisely can hurt a business in the long run and damage a reputation.

Here’s an illustration thanks to Robert Barbera, owner of Barbera Property Management in Monrovia, California with rental units in 26 apartment buildings and single family homes in the San Gabriel Valley.

Quality landscaping is important to each of Mr. Barbera’s rental units in eight cities including: Monrovia, Arcadia, and Pasadena. He talks about this and his views of tenants in a video posted on YouTube.

But why spend money on landscaping? After all, when a landlord adds up the cost of insurance, taxes, and maintenance why bother paying too much attention to trees and flowers? Shouldn’t a nicely mowed lawn be all the presentation that’s needed?

Robert Barbera believes landscaping is a strategic expense that pays in the long term.

How? It gives potential renters an attractive first impression of the apartment they’re visiting.

“Landscaping is the start of everything,” said Robert. “When people drive down a street and see a sign the first thing they see is the landscaping. That is the first test of a building. The ornamentation of the bushes and the colors that come from the flowers--it has to be right.”

Robert Barbera believes quality landscaping shows pride of ownership. He maintains a professional crew to maintain street appeal and to keep the interiors of the apartments in working order.

He believes the money spent on maintenance and upgrades keeps tenants satisfied and maintains long-term relationships.

There is value built for both parties – as an owner his vacancy rate is far less than the national average. Meanwhile, the tenants are satisfied since they feel the property owner is listening to them and considerate of their needs.

To see available units for rent in the San Gabriel Valley, log on to www.barberaproperties.com.

Cash Flow for New Businesses

New businesses chugging along in the first 2 years need to preserve cash flow above all else:

• get invoices sent out once projects are wrapped up
• make sure customers pay on time
• don't get tied up in inventory
• don't pay bills too early
• pay vendors on time
  
  Here is an article about the importance of an initial cash flow for new businesses you might find helpful.
  
  "Why an Initial Cash Flow is Important.

Remember, the cash balance and the bank balance are two different ways of looking at the same issue. The two will probably never match up since checks and payments are in circulation.

Also, look ahead quarter-by-quarter. What do you expect the cash flow situation to be for your new business?

Cash is king. If you have partners, have weekly meetings to review the cash balance, bills, invoices expected in and payments to split.

If you don't have partners, find a friend or someone you can report to on a weekly basis. Presenting the facts gives you a clear idea and understanding about the cash flow in your business.

Priorities and Cash Flow Tips

Toward the end of each month, I'd like to offer reminders on how to plan for the upcoming month and possibly each quarter.

A little time invested in planning can save money or help with the best use of money for a business.

I'll start first with planning for businesses and then a little for family use. For businesses, I'm going to start with the bottom line first - going backward. These priorities for business are more for service businesses but can be adapted.

Business Planning

• Invoices
- are all invoices current? What money do you expect to come in during July?
If customers are behind on payments, who do you realistically expect to pay?


• Expenses
- do you anticipate any unusual expenses in the coming month?


• Production
- are you producing results effectively? List out the projects that are outstanding or may create a problem.


• Sales
- how is your sales cycle progressing? How many new proposals are currrently out?
depending on your business, you may set a goal for writing a certain number of proposals each quarter.


• Leads
- are leads flowing in, drying up, or do they need more maintenance to generate new sales leads?

Business Resources

Need resources for your business or for your career but don't want to spend a lot of money?

Here are ones I've recently used:

• SCORE - Service Core of Retired Executives


SCORE offers no-cost advice to any phase of starting or running a business. Depending on the population density in your area, a variety of SCORE counselors can spend up to an hour or refer you to other counselors who can specifically help with your needs.

While I personally offer marketing consultations to companies, I'm going to see a SCORE counselor who has an extensive background in marketing himself for advice.



• Small Business Administration - there are a variety of functions the SBA performs.


Check with an SBA office in your area for resource links. I recently attended a Business Matchmaking Conference that was co-sponsored by the SBA, American Airlines and FedEx.




• The Owl at Purdue

This web site has extensive writing help available for busy professionals . . . and professionals who aren't so busy!

One way to preserve cash flow, identify one or more concerns in your business then see what free, quality resources are available to help you address those needs.

That way, if you do hire a consultant or spend money in another direction, you might be able to strengthen your position with a qualified second opinion.