2. What is Cash Flow Management?
It’s all about Alignment
(think wheels on your car)
What should you do if you have a problem?
Worst Actions
• Go faster
• Go off-road
• Fast in the
curves
• Over-inflate
• Under-inflate
• Ignore
Best Actions
• Slow until fixed
• Avoid curves
• Use straight
roads
• Monitor tires
• Keep right
pressure
• Fix alignment
3. Why do Small Businesses Fail?
• Reason # 1 – motivation - the owner gives up.
• Reason # 2 – resources - cash can’t keep up
with growth.
4. What is the ideal?
Healthy Cash Flow
- growing revenue
- growing cash balance
Unhealthy Cash Flow
- growing revenue
- falling cash balance
Required: must monitor monthly trends
6. Ideal Cash Balance
Average Cash Balance + Available Line of Credit
> 2x Average Monthly Revenue
• Average Cash Balance = average month-end balance after routine
monthly payments are made for the most recent 3 months
• Available Line of Credit = bank line of credit and company credit
cards minus any credit balances
• Average Monthly Revenue = average total monthly revenue for the
most recent 3 months
Average small business has < 1x Average Monthly Revenue + LOC
“Living on the edge”
7. Cash Management Process
Tactical
(cope with wheels that are out of
alignment)
• Prioritize bill payment
• Collect receivables
• Reduce costs
• 30 day cash plan
Make ends meet
Strategic
(keep wheels in alignment; plan a
destination)
• Adjust prices
– Lower to increase volume
– Higher to increase margin
• Set/track goals
• 90 day cash plan
Achieve goals
8. Before the Sale
• Set the correct Price
– Research
– Strategize your value-add
– Don’t be afraid to lose some sales
• Up Front -- Don’t do Business with a Customer if you
aren’t sure they can, and will, pay
– Dun and Bradstreet
– Ask for Financials
– Ask Around
• Don’t continue doing business with Customers who
don’t pay
9. Getting Payments from your
Customers
• Nemesis for many Small Business Owners
– Expect Prompt Payment - Have the Conversation
– Invoice immediately when service rendered
• Charge for Overdue Accounts .. 1-1/2% per
month overdue after 30 days is standard
– On invoices, state payment due immediately or within 10 days,
not 30
• Start a new Overdue Account policy, notify your
customers – and do it!
• Be creative with customers,e.g.,partial payments
• Bank Regularly
10. Controlling Receivables
• Terms for projects and large hardware/software
purchases:
– Advance Payments/Up-front Deposits
– Direct Payments b customers to Manufacturer/Distributor before
shipment
– Progress Payments
• Terms for Managed Services
– Payment for Month in Advance
– Deposits
• Retainers for T&M?
• Software development … funded by customer?
11. Collections
• Expecting prompt
payment up-front is
best
• You have to be the
collector
– Collection Agencies
– Factoring
• Persistent Calling
• Get form letter from
attorney
• Small Claims Court?
12. Expenses – Control before they
Happen
• Re-evaluate all expenses routinely and periodically
– Scrutinize monthly “built-in” expenses like janitorial, wireless
phones, etc.
– Watch out for “hidden fees”
– Periodically shop vendors
• Delay purchasing
• Utilize discounts
• Track rewards and utilize
• Buy in Bulk when appropriate
• Work with vendor and spread out payments
• Reward employees for cost-cutting ideas
13. Making Payments - Payables
• Flip side of Receivables:
– Delay payment until invoice is
due, specifically until overdue
charges begin
– Overdue at 1-1/2% is expensive
– Negotiate to delay/drop overdue
charges
• Scrutinize invoice and
don’t pay unnecessary
• Avoid advance payments,
deposits, retainers,
progress payments
14. Credit Lines and Buyer Financing
• Part of Many (Most?) Channel Programs
– Offered by most Distributors and Major Manufacturers
– Also Commercial Financing Operations (e.g., GE Capital)
– Go by various names – Working Capital Credit Lines, PO Credit,
Inventory Financing, Partner Credit Financing, Etc.
– Letter of Credit – variation offered by banks
• Characteristics
– Varying credit amounts available
– Varying terms (free period, interest, repayment amount, etc.)
– Terms often change in parallel with economy
– Frequently tied into PO processing
– Frequently must pledge inventory / receivables to secure credit
– Larger deals may require end-user credit and/or direct payment
15. End-User Leasing
• Offered by Many
Manufacturers
• Good for large
“purchases” by credit
worthy end-customers
• Varying Terms --
Negotiate, Negotiate
• Accounting Rules may be
changing
16. Inventory
• Inventory might as well be cash sitting on shelves
• Minimize the inventory
(let vendors carry inventory)
• Monitor the inventory “turns”
• Get rid of obsolete inventory
17. Financing Using Company Assets
• Equipment/Vehicle Financing
– Leasing
– Borrowing against (secured)
– Better rates than unsecured loans
– Easier to finance new equipment/vehicles
• Real Estate
– Renting/leasing
– Financing limited to extent you have equity
– Typically the best financing rates
– First Mortgage
– Second Mortgages/ Line of Credit
• Easier to obtain “when you don’t need it”
18. Employment Cash Flow
Techniques
• Outsourcing
– Delays payment 30-to-60 days vs. hiring employees
– Need to exercise care – employee vs. independent contractor
rules
• Salaries/Bonuses
– Pay less in salary / more in bonus (bonuses defer payment until
year-end)
– Commissions / Pay for Performance
– Equity
• Benefits
– Insurance Companies won’t allow late payments
19. Taxes and Dealing with the Gov’t
• Tax Payments
– Employment Taxes
(Federal and State
Withholding, FICA,
Unemployment, etc.)
Don’t Mess With!
– Sales and Use Taxes
Don’t Mess With!
– Estimated Federal Income
Taxes – Tax Accountant
• Property Taxes, Permit
Fees, etc. – Pay when
Due
20. Unsecured Loans, Credit Cards,
Personal Loans, etc.
• Credit Cards
– Employee Credit Cards and then Reimburse?
– Company Credit Cards – Pay on time if possible
• Loans
– Personal Credit Lines / Personal Pledges on Company Credit
Lines
– Home Equity, Second Mortgages, and other Asset Backed loans
• Shop Around
21. Cash Flow Planning
• Typically done for 90
days at a time
• Engage Accountant
or Do it Yourself
– P&L Management essential
• Cash Inflows minus
Cash Outflows
– Timing Difference between
Outflow for Purchases and
Inflow for Collections
Cash Inflows: Month 1 Month 2 Month 3
Customer
Payments
$20,000 $35,000 $18,000
Other Income $1,500 $800 $1,200
Total Cash Inflow: $21,500 $35,800 $19,200
Cash Outflows
Hardware
Purchases
$12,100 $6,400 $15,800
Salaries $12,000 $12,600 $13,000
Other Expenses $6,500 $6,900 $6,750
Total Cash
Outflow
$30,600 $25,900 $35,550
Net Cash Flow ($9,100) $9,900 ($16,350)
See CompTIA Cash Flow Management Guide for more detail
23. • Financial Dashboard
• Benchmarks
• Business model calculator
• Analyzes data from Your Accounting System
– QuickBooks (automated)
– MYOB (Australia, New Zealand - automated)
– Other Accounting Systems (file import)
• Goal tracking
• Solution for showing financial progress to your team
What is CorelyticsTM
?
Special Edition for CompTIA
Members
25. Monitoring Trends
Problems when:
• Revenue up and cash
down
• Expenses growing
faster than revenue
• Cash fluctuations are
extreme
• Revenue fluctuations
are extreme
Strategic actions:
• Set goals with
management team
• Ask team to help close
the gap between actual
and goal line
• Keep the team
informed using graphs
• Compare to industry
benchmarks
26. Wrap Up
• P&L Management – for tactical process
• Balance Sheet – for strategic process
• Accelerate the Sales and Collection Process
• Manage Expenses
• Delay the Expense and Payment Process
• Credit Lines and Buyer Financing
• Company Financing and Employee Payments
• Cash Flow Planning
• Questions?
Dashboard at:
CompTIA.Corelytics.com
27. References and Additional
Materials
• CompTIA website (www.comptia.org) – Member
Resource Center – under Business Management
Finance
• Corelytics – www.coreconnex.com for overview
• Sign-up – CompTIA.Corelytics.com
• Service Leadership – www.service-leadership.com
28. CompTIA Benefit:
Free Financial Report
See your trends, financial strength and future forecast
Free Financial Consultation
CompTIA members get consultation
with Financial Expert
How?
• Email: support@corelytics.com
• Subject: Financial Strength
• Text: Your contact information & your
current accounting system
For most small businesses, the first and best place to look for cash flow is in sales and payments due from their customers. First, and one of the most important points, is to set the correct price for your goods and services.To do so you need to perform some research. Figure out what your competitors are charging. Make sure you cover all of your costs – which you will know from your P&L Management.Strategize your pricing for what your value-add is. What is your market positioning? What value are you delivering? Many small business owners set their prices too low – they are afraid to lose any sales. You can’t be afraid to lose some sales – you have to cover your costs and have an ongoing business. On the other hand, if you are overpriced that will create problems.Getting payment from the customer starts up front with not taking on customers unless you are sure they can, and will, pay. Research your customer before you take them on – use Dun and Bradstreet to get credit ratings and/or ask for their financials. Ask around. And don’t continue doing business with customers who don’t pay
Once you’ve taken on a customer, for many small business owners, getting payment from their customers is their nemesis The small business owner doesn’t like to ask for moneyMany small business customers have their own cash flow challengesIn many cases small business owners become almost too close to their customers…they treat them as friends and are unwilling to ask for payment for products or services renderedIf you suffer from not asking for the money – you have to get over it!What you need to do is to set expectations when first engaging with a customer or if a customer becomes tardy in their payments – you are a business and need prompt payment or you won’t be able to service them in the future! Have that Honest Conversation in a very business-like manner!Tell them up-front that you charge for overdue Accounts – and then charge them! Include a notice on your invoices that you charge 1-1/2% for overdue accounts after 30 days – and then charge them on subsequent invoices. If you haven’t been charging for overdue accounts, start a new policy, notify your customers, and then begin charging them on future invoices.Many customers, once they see you mean business, will begin paying more promptly, thus helping your cash flow. And you may end up with some additional cash from the overdue charges.It’s just good business. And if some of your customers squawk, you need to take a strong position telling them that you have to pay your bills also and, if they can’t pay they will have to take their business elsewhere. You are probably in a better overall position losing a few dead-beat customers than waiting for everyone to pay you.Don’t be afraid to be creative with customers – allow them to make partial payments when necessary, etc.Lastly, make sure you bank regularly – don’t let checks from customers sit around
One of the best ways to manage receivables from customers is to avoid them. You can avoid, or at least partially avoid, receivables by some creative terms up-front in setting up customers and new projects. Creative terms of sale could increase your cash flow tremendouslyHere are some ways to avoid receivables and increase your cash flow…In setting up new projects or large hardware/software purchases, get the customer to agree to: advance payments and/or up-front depositsDirect payment by the customer to the manufacturer or distributor for hardware/software (depends on the manufacturer/distributor setting up an account)Progress payments for projects – this may involve defining some milestones and then paying set amounts based on the milestonesIf you are engaged in managed services – why not have them pay for the month in advance? Or at least pay an up-front deposit?And for T&M services where you have an ongoing relationship, you should consider some sort of retainer agreement?If you develop software and are developing it somewhat in partnership with a customer, you should consider them funding it as an ongoing project.Just some thoughts…you should think about every arrangement you have with your customers and think about how to get cash from them up-front instead of waiting for payment after the fact….
Avoiding collections by having the up-front conversations and staying on top of accounts is, by far, best. But you may be faced with Collections at some point.For small businesses, in general, you have to be the collector – turning collections over to someone else is not a viable alternative in most cases because:you don’t have enough in receivables to interest collection agenciesCollection agencies take, in general, about half or more of the receivables in feesUp_front Factoring of receivables (selling receivables before they become collection “problems”) also not particularly viable because most small resellers don’t’ have enough in receivables to interest factoring companiesPersistent calling is your first weapon in collecting from customers. A form letter from your attorney might help. Have your attorney give you a form letter on their letterhead that you can fill in the contact info and send.As a last alternative, small claims court sometimes gets customers motivated but there are 2 problems with small claims court:As a business, particularly if you are incorporated, in most localities you have to send an attorney (if it really gets to small claims court before being resolved)You still have to collect….Actually filing the small claims court complaint can sometimes get customers motivated.But coming back to it, staying on top of receivables, and not letting them get out of hand, is the best strategy from what I’ve seen.
Another key to Cash Flow is controlling expenses before they happenYou should periodically and routinely re-evaluate all expenses. Particularly scrutinize monthly built-in expenses like janitorial, wireless phones, etc. Watch out for hidden fees in many of these bills. Periodically shop vendors for example insurance carriers to ensure they remain competitiveYou should delay purchasing as much as possible, particularly of larger items like electronics, vehicles, etc.Utilize discounts. If appropriate, join buyer clubs such as Sam’s Club or Costco. Take advantage of in-store discounts, etc.Track rewards such as credit card points as utilize periodicallyWhen appropriate, buy in bulk.Work with vendors and spread out annual payments to be monthly or quarterly is another techniqueAnd there is no better incentive than to reward employees for expense cutting ideas…
Once the expense is incurred. Making payments to your vendors is the opposite of receiving payments – you want to stretch them out to the extent you can to maximize your cash flowYou can stretch out your payments by delaying paying your vendor invoices until payment is due or specifically until overdue charges beginYou need to take caution in doing this as overdue payments, at 1-1/2% per month, are expensive – well over 18% due to compounding – so you should try to avoid thatIf you can, you can negotiate with your vendors to delay, drop or ignore overdue payments. This may be particularly advantageous in dealing with new or small vendors such as small software companies hungry for sales.In paying invoices from vendors – scrutinize the invoice for unnecessary, unwarranted charges and don’t pay that which the vendor is not entitled to. And the opposite of what I told you earlier about avoiding receivables, to improve your cash flow you should avoid advance payments, deposits, retainers, and progress payments again to the extent possible.
In talking about paying vendors, distributors, etc., it often comes back to credit lines and buyer financing.There are about as many different credit lines and buyer financing programs as there are distributors, manufacturers and commercial financing operations. They go by a variety of names – working capital credit lines, purchase order credit, inventory financing, reseller credit financing, etc. A Letter of Credit is similar to this type of financing only it is offered by a bank or financial institution. Sometimes a Letter of Credit is utilized as over-and-above a credit line offered by a distributor/manufacturer or commercial financing company.These programs vary in the amount they will offer any given reseller and they have varying terms. The terms change often, mostly depending on the economy and how interest rates go.Many times these credit lines will finance individual purchase orders and may be tied into purchase order process by the distributor, manufacturer or commercial financing operation. Frequently and ordinarily the reseller will have to pledge the inventory and/or receivables to secure the credit. And if you get into larger deals, you may find it advantageous to get the end-user to use their credit and/or make direct payments. You may also be required to give a personal guarantee as an owner or company director/officer. I wish I could give you a database or data table with all the available programs and their terms but, first the offerors would probably not give me all the information and, even if they did, the moment I would write it down it would change. This might also be construed to be against antitrust laws, so I can’t.My advice would be to do the up-front analysis and research of what is available at a given point in time, establish a relationship with one of the offerors, and then periodically re-check the analysis to ensure whoever you are with is still competitive (push back on them if they are no longer competitive). It’s sort of like car insurance – it’s not good to frequently change who you are dealing with but periodically you have to make sure whoever you are with is competitive.And something to think about – IT IS ALMOST ALWAYS EASIER TO SET UP CREDIT LINES AND BUYER FINANCING WHEN YOU DON”T NEED IT THAN WHEN YOU DO…so if you don’t need it, it is nevertheless wise to set it up, use it sparingly until you really need it, and then when you really need it, use it.
End-user leasing is offered by many manufacturers and manufacturers through distributors. Leasing tends to be good when you have a large equipment purchase by a credit-worthy end-customer. It tends to take some effort to set these up – so they may not be worth the effort for smaller deals.Just like credit lines, there are all sorts of terms….lease life, end-value, interest rate, up-front amounts, etc. Frequently these leasing deals are three-party deals – the end-customer, you as the solution provider, and the manufacturer are all involved. Just like leasing a car, it requires an up-front knowledge of what the end-customer needs/wants and then requires negotiation although leasing through larger companies you have less (if any) room to negotiateOne last point that may affect leasing deals – the Accounting standards may be changing for leases – they are currently in an advanced discussion phase with probable changes taking affect within a year or two. For those of you who may have been involved with leases in the past or are otherwise knowledgeable about lease accounting, the direction that the new rules appear headed in is to have all leases appear on the balance sheet both as an asset and as a liability (previously there were two types – operating and financing which were accounted for differently and which classification a lease fell into depended on the terms of the lease). This accounting change in accounting rules may affect how favorably some companies look upon leases.
Most resellers don’t carry much in the way of inventory, but to the extent you do it might as well be cash sitting on shelves – inventory eats cashFrom a cash flow perspective, you should minimize any inventory you have – ideally not carry anyTo the extent you carry inventory, monitor the inventory “turns” – that is, how frequently each inventory item is used and replenished each quarter or yearAny inventory that is not “turning” routinely should be gotten rid of – sell it, donate it, dispose of it
That covers both collecting from sales and paying for hardware/software purchased for resaleAnother set of cash flow techniques deal with your own company assets –First whatever equipment or vehicles you have, instead of purchasing them outright, could be leased or borrowed against (that is, pledged against a bank loan). Leasing or borrowing against your assets obviously increase your cash position and can typically be done at a lower rate than unsecured loans It is typically a lot easier to lease when buying new equipment or vehicles than it is when buying used equipment or vehicles or after you already own the equipment or vehicles. There are sophisticated discounted cash flow models for when Leasing provides value vs. owning. I will refer you finance books for those calculations rather than boring most everyone with something that you will probably not use. Renting or leasing office space obviously gives short-term cash flow vs. buying. But if you own your office or have an office condo, you can finance it (to the extent you have equity). Typically financing real estate will give you the best financing rates of anything we will talk about in terms of borrowing money Unless you own the property outright, you will have a first mortgage on the property – what that means is the bank (or savings and loan) has precedence if you don’t make payments and they have to foreclose Second mortgages and lines of credit fall behind the first mortgagor in terms of precedence in foreclosure. Depending on the interest rate structure when they are taken out they typically have higher rates of interest than first mortgages – so again depending on the current interest rate structure vs. the interest rate structure when you took out the first mortgage and your ability to refinance you might be better off refinancing your first mortgage instead of taking out a second mortgage. The difference between a straight second mortgage vs. a real estate line of credit is just that the line of credit can be tapped up to a limit and you are charged on what is outstanding vs. taking a full mortgage amount outAll financing, including equipment/vehicle financing and real estate, is generally easier to obtain when you don’t need it. The moment you are challenged financially it is more difficult to get the financing – so set it up when you don’t need it.
There’s a few things you can do in this area to enhance cash flowFirst is outsourcing some of your work. Outsourcing, while it may increase costs, may help cash flow. By paying an outsourcing company for work, you can wait to pay them for 30-to-60 days, or more, without a problem – if you hire the equivalent help, at a minimum you have to pay them within 30 days. If you have a large contract, you might try negotiating with the outsourcing company to pay them when you get paid – a great technique to enhance cash flow. You do need to exercise care in terms of when a worker is an employee versus independent contractor – the IRS continues to crack down on this. In general, if you have an outsourcer who is full-time for an extended period, you really need to examine these rules or you can be caught for a lot of back taxes and penalities.As far as salaries and bonuses, the more you pay in year-end bonuses vs. salaries during the year, the more it enhances cash flow. Senior level employees are a better target for this rather than more junior employees who typically are living day-to-day on their pay.Obviously pay for performance and commissions instead of fixed salaries tend to help cash flow.And, although many owners don’t want to go here or go here too heavily, equity in lieu of salary obviously helps cash flow.There’s relatively little you can do with benefits that will help your cash flow. In general, from what I’m aware of, the insurance companies will shut you down pretty quickly if you get behind in payments.
In general, there isn’t too much you can do concerning tax payments and government payments in general to increase your cash flow. The IRS, and governments in general, are not forgiving debtors – you can get yourself in more trouble, and cost yourself far more money, than it is worth by deferring government payments! But let’s explore…First, one of the fastest ways to get into trouble with the government is by not paying employment taxes – by employment taxes I mean Federal Withholding, State Withholding, FICA, Unemployment taxes, and any local withholding. I’ll even throw 401K contributions into this category. Don’t mess with these payments – pay them on time! Sales and Use taxes – again another area that is not worth messing with.The one place you can explore government tax payments is estimated federal income taxes – the quarterly payments. Work with your tax accountant to stay within the law – in general you have to meet your prior year’s tax obligation or this year’s obligation – so if your tax accountant believes you will pay less in taxes in the current year than last year, you may be able to increase your cash flow by reducing your payment. However, if you do this and then get caught owing more in taxes, you will have to pay a penalty so care is required.Property Taxes, and other miscellaneous government fees – should be paid on due dates as there are generally penalties that are large enough (from a rate of return perspective) to make them not worthwhile withholding
Let’s talk unsecured loans, personal pledges and credit cardsFirst Credit cards. One technique is to have employees have their own credit cards and then reimburse them for expenses…this spreads out the cash flow and if the employees retain the miles or “points” or whatever they get with the cards, they may be happyYou can also take out a Company credit card. If you do and pay on time, there’s no interest and you have cash flow for an additional 30 days or so. Credit cards are obviously expensive if you don’t pay on timeWhile it is not desirable to many people, you may be able to obtain a personal credit line from a bank, savings and loan or credit union. If you personally (as a company officer/director) pledge on a company credit line, you should think of it as though it is a personal credit line because the issuer (that is, the bank, savings and loan or credit union) will come after you just the same as if you had a personal credit line. Again, not very desirable to many people, but you may pledge your personal assets, your home or other real estate you own, your automobile, or other personal assets on a loan. Generally, loans which are asset backed have better interest rates than unsecured credit lines or credit cards.For all these personal loans, credit cards, etc., you obviously need to shop around as there is a myriad of options, terms, and rates.
Cash Flow planning is typically done for 90 days (3 months) at a time. One normally constructs a spreadsheet such as the one shown on the slide only with more detailed line items. You can engage an accountant to develop a spreadsheet or do-it-yourself. What is essential is that you have a good P&L and are managing it.What Cash Flow planning does is to highlight the timing difference between the outflow for purchases and the inflow for collections. The entire calculation is Inflows minus Outflows.
