Going With the (Cash) Flow

Entrepreneurs can look at these strategies to help the bottom line

The need for cash flow management at Troy, Michigan-based M.O.R.E. Computer Supplies came before the company opened its doors in 2001. William Jordan, chairman and COO of the 11-employee distributor of office products, knew management would have to track money flows closely.

Distributors are often caught between manufacturers who want to get paid within 30 days and end users/customers who string them along 45360 days or more, making cash preservation and “thinking ahead” very necessary for survival. So the company, which had $4.5 million in 2001 sales and expects $7 million to $8 million in 2002 sales, adopted three measures to watch its cash flow.

Cash flow is simply the money going into a business and out again–cash on hand and/or in a business account that’s used to pay company bills, salaries, and other expenses. Companies that are cash flow negative are simply spending more than their revenues bring in.

To keep reins on its cash flow, M.O.R.E. paid sales people on commission and only after the 45-to-90-day payment period from their own customers. Then it took only enough of a cash distribution for its partners to cover the taxes they owed on their Subchapter S income, where instead of reporting profits on the corporate tax return, shareholders (including the business owner) are taxed on amounts received from the company. Reinvesting into the business and keeping cash on hand rather than pulling profits out of the venture helped them secure a $250,000 line of credit from a bank early on, which was increased to $750,000 12 months later.

But many small businesses do run into cash flow trouble, especially during the start-up phase, growth spurts, or in shaky economic times. To avoid the problem, experts advise small businesses to negotiate better terms with vendors and do background and reference checks on new customers.

Albert J. Zdenek Jr., president of Flemington, New Jersey-based financial planning firm Zdenek Financial Planning Inc., says other key causes of cash flow problems are inadequate budgeting of income and expenses, not watching receivables, not setting goals, and trying to handle the company’s financial management solely.

Small business owners can also tap into these resources:

  • Accounting and financial professionals. A quick review of financial statements by a trained eye can help detect slow collections, poor financial management, overextended accounts payable or other warning signs, early. Financial advisors can provide similar services. Referrals can be obtained through the National Association of Personal Financial Advisers (www.napfa .org) and the American Institute of CPAs (AICPA), (www.aicpa.org).
  • Financial institutions. Visit a bank for assistance with a line of credit, an accounts receivable loan, or another vehicle to ease the cash crunch. Banks also provide ancillary services for their small business customers. For example, Wells Fargo (www.wellsfargo.com/biz) offers an assistance program especially for African American small business owners. The best way to measure potential problems in business is by projecting cash flow needs–managing receivables and expenses. Also, the small business that tracks sales consistently can immediately tell if sales dip below projections, thus allowing for early adjustments (cutting expenses,
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