By William Lynott
Do you know just how much impact skillful cash management can have on net income? Losing control of money has generated more financial headaches for business owners than temporary red figures on the bottom line. Conversely, a sensible cash management system can provide a comfortable and profitable cushion during good times and bad.
Here are eight powerful techniques to help smooth out cash flow and improve net income:
1. Keep every income dollar working for the company.
It's important to put every revenue dollar to work as soon as it is received. An easy way to do so is to open a money market account and ask to have it linked to the business checking account. Then deposit all daily receipts into the money market account where they will immediately start drawing interest. Never deposit receipts directly into a checking account. Keep a minimum balance in the checking account and transfer cash by phone or online only as needed to cover checks to be written.
2. Don't be in a hurry to pay bills.
There's reason why checks are slow to come in from people who owe money: It's because hanging on to cash as long as possible keeps that money available to work for the business. To this end, set up a system that allows for bills to be paid just before they come due—not before, not after. It is especially important to avoid late payment on credit card bills because of the oppressive penalties that most banks have put in place.
3. Be aggressive collecting accounts receivable.
Never neglect accounts receivable. Dunning a late-paying debtor may not be a favorite pastime, but setting up an accounts receivable file and following through on late payments is important to financial success. When customers learn that a business is cavalier about money owed to it, most will stretch that patience (and the company's cash flow) to the limit.
4. Maintain a cash cushion.
Try to keep enough cash in interest-bearing accounts to cover normal operating expenses for three to six months. While that's not always an easy thing to do, it can provide invaluable peace of mind and self-confidence when revenue is down during a market slowdown. Also, keep in mind that the cash cushion is silently making money in those interest-bearing accounts.
5. Develop a personal relationship with the banker.
Handling money is a banker's job, and most are very good at it. While many businesses prefer to keep financial matters close to the vest, it's a smart idea to develop a personal relationship with the manager of the local bank branch. Make an appointment, discuss the financial picture honestly, and good ideas and a favorable ear will be nearby should a little financial help be needed.
6. Let the computer help.
Whether it's a heavyweight industry-specific software packages or Quicken or Money, trust every aspect of the businesses affairs, including business and personal investments, to a computer. The financial reports and analyses that modern software can produce at the touch of a button can be vitally important management tools for improving cash flow and bottom line profits. The most popular software packages designed for small business are infinitely easier to use than they were as recently as a few years ago. More important, they demonstrate in dramatic fashion how much a business can benefit from a sensible cash management system.
7. Consider leasing.
“The nature of business accounting is such that leasing can be the most sensible approach to many types of capital investment,” says accountant Jay Blumenthal, Abington, Pennsylvania. “It usually makes sense to lease if you will be able to use the cash in your business activities or in your investments to earn a better return than the cost of leasing.” If charging out any part of a capital expenditure is an option, it may pay to lease instead of buy. Talk to a tax advisor about this the next time any capital purchase is being considered.
8. Consider changing banks.
The average businesses has been a victim of merger mania at least once—waking up one day to find that the bank it has grown comfortable with has merged with a strange new bank that promptly laid claim to the business. Will this new bank, which is larger than the gross national product of some countries, treat it better? Will it exercise economies of scale in order to bring it better and less expensive services? Not likely. Experience is showing that some of the huge megabanks resulting from merger mania are raising inefficiency and customer alienation to new heights. Fortunately, solving this frustrating problem is relatively painless. Just search out the smallest FDIC member bank in the area and give it a try. A small bank will be delighted to welcome the business and will offer more personal attention than a financial goliath—with exactly the same insurance protection offered by the largest banks.
Taken individually, these cash management techniques may seem obvious or even inconsequential. However, when blended together in a consistent manner, they will form a significant and permanent contributor to a company's net income and economic well-being.
Tagged with tED