So we think we have seen the worst of it and the economy is on the way up. Everything is all uphill now, right? Wrong. Many businesses have seen a contraction of their revenues and profits over the last year and half but have weathered the storm. Part of the reason is cash flow, as a business contracts it usually experiences positive cash flow. The large receivables from the “good year” are collected. Cash increased while our receivables and inventory decreased. This has helped finance the business.

As the business grows again, the opposite will happen. You will have to buy more inventory and your receivables will increase. If you have not planned for it, this period could become the real challenge. If you have a plan to weather this part of the recession, you will be in a stronger position. Don’t wait until you need funds to try to find them, do a cash flow analysis now to determine when the business will need additional financing.

Cash management involves analyzing banking activities, billing and collections, purchasing, disbursements, budgeting, forecasting, investing, borrowing and managerial controls.

A key to cash management is cash flow. Cash "in" is coming from customers. Therefore, billing procedures should be analyzed. Are invoices being sent timely? Remember, the earlier a customer has the invoice, the sooner it gets paid. Other useful billing procedures include offering early payment discounts and charging interest or finance charges to delinquent accounts. These practices should be carefully analyzed though before implementation because they require added bookkeeping time.

Personal calls to delinquent accounts from a person with power usually results in payment faster than a letter or call from the billing clerk. Calls enable you to obtain definite commitments about dates and amounts of payments. It is also important to follow up with immediate action (legal or otherwise) if customers don't honor their commitments.

Cash deposits should be made daily if possible. Some companies should consider the benefits of a lockbox or preauthorized transfers from customers' checking accounts. These techniques can be costly however and should be carefully deliberated before ordering the service from your bank.

Controlling cash "out" while maintaining good vendor relations is key. Rigid payment procedures (ex. paying bills semi-monthly) usually are not efficient. Examine all cash needs and opportunities before making capital purchases or taking advantage of early payment discounts. Perhaps an extra payment on debt would be better. Also analyze purchases to determine if money is being spent on idle inventory.

Also, cultivate good working relationships with your bank. Balance using the banks investments and other services against the probability that a loan will be needed in the future. Other bank services include zero balance checking accounts (overnight investment and sweep accounts).

There are a number of techniques businesses can use to better their cash position. CPA's can be a source of help with any of the above concepts. We at Jones Hall Advisors are big advocates of planning for business and making it happen. We are available to help with this area, just ask.

In Luke 16, Jesus told a parable about a steward who had lost his job and faced an uncertain future. To make amends he made quick work collecting his master's receivables while improving the relationships with the creditors. Jesus said that the master commended the steward for having dealt shrewdly -- managing the cash flow with a long-range plan. The parable is, of course, about spiritual principles, but has practical value to men and women in business today.
Luke 16:11- So if you have not been trustworthy in handling worldly wealth, who will trust you with true riches?