1. Know Where You Are & Where You're Going.
Assess your business's current cash position and the develop a forecast. These activities will tell you if your receivables are being collected fast enough to pay vendors on time and whether you're optimizing your float. It will also highlight low cash months so you can slow spending or prepare for a line of credit ahead of time.
2. Analyze Accounts Receivable and Payable.
If your cash analysis turns up more cash out than cash in, the best place to start is with your receivables.
Receivables: Companies are gearing-up for slowing receivables. Be prepared in this economy for ploys and excuses. But, of course, sometimes customers aren't paying for other reasons you could be unaware of. A payment inquiry can open doors that lead to discussions about product quality, service delivery, etc.
Are you shy about collecting? Don't be. Collecting on time and sticking to your credit policies are critical to keeping your money flowing in.
** Be wary of clients who don't respect their vendor relationships. Not all customers are good customers; don't finance their business by giving them the opportunity to continuously pay you late.**
Payables: Scrutinize all your expenditures and treat your marketing dollars like precious gems. If you have a low ROI (return on investment), you should examine your marketing plan. Another tip: take advantage of payment discounts and don't pay too soon - capitalize on float.
3. See Your Banker.
Your bank has an array of cash management tools available. Get your line of credit now when things are good; don't wait until you've run low on cash. Another mistake is not having a higher interest-bearing money market account to park excess cash.
Also, limit the number of accounts you have at different banks. By consolidating accounts with one or two banks, you gain greater control and can negotiate more favorable fees and loan terms. Lastly, inquire about putting your operating account on "analysis." This service will give you a finely detailed statement of all activity related to your account with an earnings typically extended to offset the monthly fees.
4. Know Your Break-Even Points.
Running-out break-even analyses will help you gauge the results of changes in cost and pricing. Know your break even points today because it will allow you to make better decisions about the future.
Your break-even analysis can help you answer questions such as:
- How much will my new employees need to sell to pay for themselves?
- If I buy new equipment, how much will I need in sales to cover the costs?
- If my sales drop off, how much do I need to cut my costs to avoid losing money?
- How much do I need to sell if I want to earn a specific profit?
If you'd rather be out selling than crunching numbers, then make sure you have the right person to do that for you. Most business owners have a "tax guy" they see once a year who either just prepares the tax return, or (if they are proactive) will give you feedback to minimize taxes. And then there is the bookkeeper who may not have adequate training to handle more sophisticated "corporate" finance. If you don't have a financial VP, you may not know the implications of what your cash on hand means to your business at large.
If your business is still small and you don't need or cannot afford a full-time CFO, find an accounting firm that will provide you some of the end-to-end oversight at a reasonable rate.