Cash Flow Strategies for small Business and Franchises

Small business owners face a mess of challenges as they struggle to develop their business from infancy to a stabilized operating entity. One among the foremost critical areas to manage from the financial and operational perspective is income. Following are several strategies that business owners can apply to help with income management.

Almost all business owners understand the old saying “Cash is King”, but many remain unaware of the cash sources and uses within their business. Although many business owners view net as a cash benchmark, net provides only a partial picture.

Profit and Loss Statement

The profit and loss statement (“P&L”) provides business owners with a sign of the company’s economic performance. However, unless the books are kept strictly on a accounting, the reported net very rarely equals the rise or decrease in cash holdings. (In accounting, most transactions are reflected within the P&L.) Instead, many companies elect to use Online Accounting Services where expenses are matched with sales, no matter whether cash has been paid out or has been received. The lesson here is that net doesn't equal cash.

Business Plan

Prior to receiving any financing, a business typically must submit a business plan which provides a road map on how that company will achieve and sustain profitability. The plan identifies sufficient sales volume levels and related expenses. Continuous comparison and adjustment of actual operational revenue and expenses, between the P&L and therefore the business plan, is an efficient method of managing cash resources provided by net.

Balance Sheet

The record lists assets owned by the corporate, liabilities thanks to third party creditors, and therefore the portion of the assets remaining for the company’s owners. Frequently, the record isn't prepared in conjunction with the P&L, or it's overlooked in favour of the P&L. Unfortunately, control over the record may be a major think about cash management, so overlooking it are often detrimental.

As unlikely because it seems, a profitable company can become insolvent and end in bankruptcy protection. Cash usage not reported within the P&L, like significant increases in inventory and receivables quickly can reduce a company’s liquidity. Following are strategies for managing the record.

Cash Account: Keep a running ledger of the cash balance to assess cash levels on a day to day. Reconcile that ledger with the statement monthly, and don't base the company’s cash position assessment on the reported bank amount. However, check bank balances and transactions daily to verify everything was captured within the ledger. Nothing ruins the business owner’s day like discovering an unexpected bank overdraft.

Accounts Receivable: The materiel for many business owners is sales, Sales, SALES! If sales are “cash only”, increases are an exquisite thing. However, if the bulk of company’s sales are credit based, a niche may exist between the timing of money receipts and their related cash payouts. If this negative trend continues during a period of serious revenue growth, the corporate will find itself during a deficit cash position. To mitigate this sort of situation-

Confirm the creditworthiness of all perspective credit customers, if possible.

Review sales orders daily and ensure invoices are generated.

Verify that customer terms are properly recorded within the accounting software.

Review the assets aging weekly, and get in touch with any customers with overdue accounts. Notate the date, customer’s name and payment amount.

Consider offering a tenth – 2% discount for patrons who pay within 10 days or earlier.

Accept credit cards rather than issuing credit. MasterCard settlements are realized by the business within 2 – 3 days, while the customer retains the advantage of not having to buy 30 – 45 days. Note: there's normally a 2% – 5% transaction fee, plus upfront card processing equipment costs. Make sure that retail prices include these costs using the subsequent calculation: Up charge Pct = (Expected annual MasterCard sales / expected total annual sales x transaction fee pct) + (upfront cost / expected annual total sales)

Inventory: Inventory can increase extremely rapidly if the new business owner cannot accurately predict sales volume or if the business owner is persuaded by high sales reps to forward purchase high quantities at discounted rates. This example may result within the company having “FISH” inventory (First In, Still Here). To regulate inventory levels:

Review the inventory holding areas and notate any excessive holdings.

Check movement records for slow moving items, and adjust retail pricing to a lower liquidation level.

Perform a physical count a minimum of twice a year.

Prepaid Items: Avoid paying a payment for items like insurance and maintenance contracts. Instead, plan to finance payments throughout the coverage period.

Fixed Assets: Fixed assets include items that a useful life exceeds 1 year, like equipment. A basic financing rule is that fixed assets shouldn't be acquired with cash but rather with long-term debt (unless the corporate has quite sufficient cash).

Accounts Payable: The business owner must balance maintaining sufficient cash reserves with maintaining healthy vendor relationships.

Write checks rather than using ACH payments. If the corporate is during a “cash crunch”, consider paying vendors with checks. Although the ACH facilitates transaction processing, it shifts cash control from the business owner to the seller.

Communication: Contact the seller if payment can't be made consistent with the prescribed terms, and let the seller know that payment could also be delayed. there's nothing more detrimental to vendor relationships than a communication breakdown. Consider sending the seller a daily partial “good faith” payment if full payment can't be immediately made. Remember, Cash IS King.

Using company credit cards to buy certain expense items can provide an additional 30 – 45 days to the expense’s normal payment term. Be sure to pay all of the MasterCard balances by their maturity to avoid costly finance charges.

Review all vendor terms within the Online Bookkeeping Services in Charlotte to make sure that vendors aren't paid prematurely.

Taking advantage of a vendor’s early pay discount (ex. 2/10 net 30) provides a big annual return of 36%, but make sure that sufficient cash reserves are available for this investment.

Credit Line: plan to secure a bank credit line to assist bridge gaps caused by record items that are temporarily out of alignment (ex. AR).

Kayabooks features a team of execs experienced in income planning and management for small to mid-sized companies.