May Cash Flow Financial Brief

In the world of business, cash is king. You can have the best product on the market, but if you run out of cash, it doesn’t matter. Poor cash flow is one of the primary reasons businesses fail.

“Companies sometimes aren’t realistic when it comes to predicting their income and expenses,” says Glenn Lauter, Senior Vice President of Business Banking with Comerica Bank. “Businesses will overestimate their income, underestimate their expenses and won’t see a cash shortage coming and end up running out of money.”

Cash flow is the movement of money within a business, both expenditures and income. The lag between the two is the problem. Cash flow management, delaying outlays of cash as long as possible while encouraging anyone who owes you money to pay it as quickly as possible, is the solution. Successfully managing cash flow means being able to answer “yes” to the question, “do I have enough cash in my bank account to cover my expenses?”

Lauter offers four tips to make sure your business cash flow management stays on track.

Watch for warning signals. It’s easy to get wrapped up in day-to-day operations and overlook indications of upcoming cash flow short falls. To avoid cash flow problems, watch out for and heed early warning signals like account balances that continue to be lower than anticipated for long periods of time, sales slowing down, payments to suppliers being continually delayed and plans for growth that keep being put off. All of these problems should be considered warning signs and should be addressed immediately.

Establish a cash flow budget. “A cash flow budget will enable you to predict your company’s ability to take in more cash than it pays out,” says Lauter. “It can also predict cash flow gaps so that you can take steps to close, or at least narrow these gaps.”

There are items to consider when thinking of a cash flow budget. One is your sales forecast. Any forecast will face some uncertainty due to a difficult economy, inflation and competitive influences. However, a sales forecast is still an important step in attempting to predict major cash flow problems. You should also take into consideration projections of cash inflows and outflows. Does your business accept cash sales only or does it extend credit? Think of the cost of goods, expenses, major purchases and any debt payment to help predict your outflow as well. All of these will end up affecting your cash flow in the long run.

Head off problems. Most cash flow problems can be avoided ahead of time by following a few simple steps. First, keep better track of accounts receivable, especially late-paying customers. Second, manage your inventory closely. Try to have enough inventory to satisfy your product line and deliver needs, but no more. Lastly, increase prices marginally if necessary. Implementing a 1-2% price increase is reasonable if you have a strong sense of your customer base and know the point at which you would start losing sales.

“You should also review your staff needs,” says Lauter. “Do you have more staff than you need? Are you using them efficiently? Consider hiring part-time or temporary employees to help during peak periods. In a service business, employee’s wages are your inventory and understanding the trade-offs between employees and contract workers is a key component in maximizing cash.”

Other helpful steps include managing accounts payable, analyzing benefits to leasing versus buying an asset and borrowing judiciously to position your company before creditors as being well-managed.

Get a line of credit if needed. Even when it’s temporary, the impact of poor cash flow can be significant. Disbursements may be delayed, penalties and late fees incurred and shipments withheld. If necessary, get a business line of credit to avoid this. Comerica offers a business line of credit that can provide you with the funds you need to help grow your business.

Cash flow management is at the core of making your business successful and when done correctly, will help make your business profitable. Following these easy steps will help you master cash flow management and help make your business a lasting success.

For more information, please contact Kristin Arena at 214.871.7723 or
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Source: Comerica Bank, Member FDIC. Equal Opportunity Lender.