Ten tips for improving your cash flow

You may have great sales and be profitable, and still may be in trouble, because you don’t have enough cash available for day-to-day operations.

By Bonnie Kreitler

Never mind sales. Never mind profits. Never mind available capital or accounts receivable. The real name of the business game is positive cash flow.

One of the biggest ironies facing many small businesses, says Zaiga Antonetti, associate director of the Connecticut Small Business Development Center (CSBDC), is that a business may have great sales and be profitable, and still may be in trouble, because it does not have enough cash available for day-to-day operations.

Paying careful attention to business management can help avoid a cash bind, business experts say. Here are 10 things they recommend you do to keep cash flowing:

1. Bill promptly. A bill doesn’t start aging until the customer receives it, notes Jack Krichavsky, partner in charge of commercial services in Arthur Andersen’s Hartford office. Try to bill at the time of service whenever possible. At the very least, bill as soon as you can get the invoice out in the mail. If you wait five, 10 or 15 days to send a bill out, you automatically tack that much time onto your wait for the cash.

2. Collect receivables aggressively. Actively managing receivables is one of the best ways for small-business owners to keep cash flowing, says Brian Kost, senior manager of the Hartford office of the accounting firm Deloitte & Touche. Send second notices out promptly as invoices become 30 days old. And consider charging interest after an invoice has been unpaid for 60 or 90 days. The longer a bill goes unpaid, the less likely the business will ever receive the cash. After six months, a business has a less than 60% chance of collecting.

3. Tighten credit terms. Try to shift as many customers as possible from a credit to a cash basis by tightening credit terms, encouraging cash-and-carry with price incentives, or eliminating credit altogether for all but your largest accounts. At the very least, scrutinize the credit-worthiness of new customers very closely before extending credit — for example, by checking with a credit-reporting service such as Dun & Bradstreet. Credit ties up money in accounts receivables, subjects a business to bad debts and increases administrative costs.

4. Maximize your own available credit. Take full advantage of the 30 days offered by suppliers when paying bills, says Kost. And take advantage of your line of credit with credit-card companies. Put things like travel expenses, office equipment or office supplies on a business credit card. A combination of factors, including the merchant’s promptness in submitting the purchase and the close of your billing cycle, can enable you to hang on to your cash up to several more weeks.

5. Watch your pricing. Too many small-business owners underprice their goods and services, and have too low a profit margin, says Krichavsky. Antonetti agrees. Many small-business owners don’t even know how to figure the break-even point for goods they produce, she says. Those in service industries have an even harder time.

6. Put reserve cash to work. Make the most of the available cash you have, says Kost, by asking your bank to take your account to a zero balance each day and invest the money in very short-term investment vehicles. At a minimum, keep reserve cash in an interest-bearing savings account instead of a checking account, or look into short-term certificates of deposit or Treasury bills.

7. Rein in expenses. Sometimes it can be easier to raise cash by saving on expenses than by increasing sales, says Krichavsky. A business with a 10% profit margin needs $1,000 in sales to generate $100 of profit. Turned around, if that business saves $100 in expenses, it’s the same as if it made $1,000 in sales.

Regardless of the size of your business, Krichavsky adds, centralize purchasing and procurement, so that one individual can become knowledgeable enough to shop for deals and discounts. Never make full advance payment for expensive services like insurance. If your insurance company doesn’t offer a payment schedule, ask for one that spreads out the demands against your cash over time.

Kost recommends calculating your first quarter’s estimated income-tax payment carefully to avoid overpaying — and unnecessarily tying cash up — at the beginning of the year. The idea is to hang on to your cash as long as possible. Kost also recommends managing inventory on a just-in-time basis whenever possible, to minimize borrowing; leasing instead of buying or borrowing, in order to spread out cash demands over a longer period; and converting fixed costs to variable costs whenever possible by outsourcing things that make sense, such as payroll administration.

8. Budget your cash. Project your cash needs, taking seasonal fluctuations, volume purchases of raw materials, or other "cash blips" into account on a daily, weekly or, at a minimum, monthly basis. Then track actual cash coming in on that same basis, to catch cash-flow problems before they get out of hand. If you are borrowing, find out in advance how restrictive your lender is going to be about how you manage cash flow, to be sure you will have cash flexibility when you need it.

9. Keep good financial records. Budgeting cash flow, tracking expenses, managing accounts receivables, and other things that will help cash flow all require good financial records. With the computing power and versatile business software available today, business owners have ready resources to monitor their business’s financial health.

10. Get good advice. Antonetti says too many small-business owners do not understand basic accounting concepts, such as break-even points, or how cash, receivables, profits and sales are related. She recommends that any small-business person work closely with an accountant to keep track of the cash flow in the business’s operating cycle.

Small businesses without an accountant can take advantage of CSBDC’s free business counseling for help with analyzing and improving their cash flow. (Call the CSBDC’s Storrs headquarters at 860-486-4135 for the center nearest you.) CSBDC clients who meet certain criteria may also qualify for free accounting help from the Community Accounting Aid Service (860-570-9113), a group of volunteer accountants affiliated with the Connecticut Society of Certified Public Accountants.

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