How to Keep the Cash Flowing

by Elliot Gurian, C.P.A.

Many companies develop financial problems because they don't
understand basic cash flow management techniques. To keep your
business from becoming a financial casualty, focus your attention
on the most critical component of the company -- cash flow.
Basic cash flow principles were established in the early
1900s. Small businesses would keep track of their cash from a
box. The box -- which contained the day's business receipts --
was used to pay salaries and purchase inventories and supplies.
To be able to operate the next day, it was very important that
the box contained some cash in it at the close of the business
day. By adhering to that same basic principle, you can help keep
your company financially sound.
Begin by having an accountant or business consultant prepare
a daily cash flow forecast for you for a six-week period. Review
this daily. The goal is never to spend more cash than that which
is collected each day. Most receivables and payables should be
scheduled by specific payment dates.
Poor cash flow is not a problem. It is a symptom of business
problems. If all other aspects of your business were performing
properly, you would have all the cash that your business needs to
operate.
How can you improve poor cash flow? If you are like many
business owners your answer is, "Increase sales." Increasing
sales will rarely eliminate cash flow problems. In fact,
increasing sales will likely magnify them. For example, without
changing credit policies, doubling your sales will probably
double the time and money you spend trying to collect accounts
receivable.

In "The Graduate," Dustin Hoffman's character was told that
"plastics" was the key to his future success. Your key to solving
the problems that lead to poor cash flow is "courage."
You need the courage to raise your prices or fees if they
are too low. If you double your prices or fees and you lose half
of your customers, you are left with the same revenue that you
had before, with more time to drum up additional business.
You need the courage to eliminate poor product lines --
those that are not making enough of a profit or are no longer fun
to sell. Yes, it should be fun to be in business. That's one of
the reasons you started your business in the first place. If you
don't think so, you should seriously consider getting a job.
You also need the courage to drop employees who are not
pulling their weight. Is each employee bringing in three or four
times the amount that you are paying them? If not, why keep them?
You should take a close look at your company's collection
procedures. Do not allow collection problems to start in the
first place. Plan how you will be paid before the sale is made.
Remember that, in the mind of your customer, the value of your
product or service drops drastically shortly after they buy it.

Following are some steps to take to improve your collection procedures:

1. Get paid up-front whenever possible. Re-evaluate your need to give terms. Think about how time and money you would save if you didn't have to collect your accounts receivable.
2. If they won't pay in advance, try to get them to use a credit card-- you get your payment immediately.
3. Consider changing your payment due period from 30 cays to a shorter period.
4. Indicate a specific due date on bills.
5. Eliminate bad payers, spend your time pleasing those that respect your efforts by paying their bills.

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Your work career is finite, probably about 80,000 hours
long. Do you want to spend any of it chasing after money that
you've already earned? How much of it do you want to waste trying
to pick up after employees who are not producing? How many hours
can you spare pushing a product line that doesn't excite you
anymore?
Farmers routinely pull out the puny plants in their crop,
the ones that will never make it to market. They do not think of
it as being courageous. It just makes sense. If they cannot sell
an undersized or deformed ear of corn they know that they must
not allow it to consume the water and nutrients better used by
the healthy plants. Like the farmer, we must be aware of the
ever-present necessity to cull out the weak and sick aspects of
our practices.


Elliot J. Gurian, CPA is the owner of Triple Check Income Tax &
Business Services in Port Jervis, NY.

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