Cash Flow Strategies for small Business and Franchisesby Lima Dutta Accounting services
Small business owners face a mess
of challenges as they struggle to develop their business from infancy to a
stabilized operating entity. One among the foremost critical areas to manage
from the financial and operational perspective is income. Following are several
strategies that business owners can apply to help with income management.
Almost all business owners
understand the old saying “Cash is King”, but many remain unaware of the cash
sources and uses within their business. Although many business owners view net
as a cash benchmark, net provides only a partial picture.
Profit and Loss Statement
The profit and loss statement
(“P&L”) provides business owners with a sign of the company’s economic
performance. However, unless the books are kept strictly on a accounting, the
reported net very rarely equals the rise or decrease in cash holdings. (In
accounting, most transactions are reflected within the P&L.) Instead, many
companies elect to use Online Accounting
Services where expenses are matched with sales, no
matter whether cash has been paid out or has been received. The lesson here is
that net doesn't equal cash.
Prior to receiving any financing,
a business typically must submit a business plan which provides a road map on
how that company will achieve and sustain profitability. The plan identifies
sufficient sales volume levels and related expenses. Continuous comparison and
adjustment of actual operational revenue and expenses, between the P&L and
therefore the business plan, is an efficient method of managing cash resources
provided by net.
The record lists assets owned by
the corporate, liabilities thanks to third party creditors, and therefore the
portion of the assets remaining for the company’s owners. Frequently, the
record isn't prepared in conjunction with the P&L, or it's overlooked in favour
of the P&L. Unfortunately, control over the record may be a major think
about cash management, so overlooking it are often detrimental.
As unlikely because it seems, a
profitable company can become insolvent and end in bankruptcy protection. Cash
usage not reported within the P&L, like significant increases in inventory
and receivables quickly can reduce a company’s liquidity. Following are
strategies for managing the record.
Cash Account: Keep a running
ledger of the cash balance to assess cash levels on a day to day. Reconcile
that ledger with the statement monthly, and don't base the company’s cash
position assessment on the reported bank amount. However, check bank balances
and transactions daily to verify everything was captured within the ledger.
Nothing ruins the business owner’s day like discovering an unexpected bank
Accounts Receivable: The materiel
for many business owners is sales, Sales, SALES! If sales are “cash only”,
increases are an exquisite thing. However, if the bulk of company’s sales are
credit based, a niche may exist between the timing of money receipts and their
related cash payouts. If this negative trend continues during a period of
serious revenue growth, the corporate will find itself during a deficit cash
position. To mitigate this sort of situation-
Confirm the creditworthiness of
all perspective credit customers, if possible.
Review sales orders daily and
ensure invoices are generated.
Verify that customer terms are
properly recorded within the accounting software.
Review the assets aging weekly,
and get in touch with any customers with overdue accounts. Notate the date,
customer’s name and payment amount.
Consider offering a tenth – 2%
discount for patrons who pay within 10 days or earlier.
Accept credit cards rather than
issuing credit. MasterCard settlements are realized by the business within 2 –
3 days, while the customer retains the advantage of not having to buy 30 – 45
days. Note: there's normally a 2% – 5% transaction fee, plus upfront card
processing equipment costs. Make sure that retail prices include these costs
using the subsequent calculation: Up charge Pct = (Expected annual MasterCard
sales / expected total annual sales x transaction fee pct) + (upfront cost /
expected annual total sales)
Inventory: Inventory can increase
extremely rapidly if the new business owner cannot accurately predict sales
volume or if the business owner is persuaded by high sales reps to forward
purchase high quantities at discounted rates. This example may result within
the company having “FISH” inventory (First In, Still Here). To regulate
Review the inventory holding
areas and notate any excessive holdings.
Check movement records for slow
moving items, and adjust retail pricing to a lower liquidation level.
Perform a physical count a
minimum of twice a year.
Prepaid Items: Avoid paying a
payment for items like insurance and maintenance contracts. Instead, plan to
finance payments throughout the coverage period.
Fixed Assets: Fixed assets
include items that a useful life exceeds 1 year, like equipment. A basic
financing rule is that fixed assets shouldn't be acquired with cash but rather
with long-term debt (unless the corporate has quite sufficient cash).
Accounts Payable: The business
owner must balance maintaining sufficient cash reserves with maintaining
healthy vendor relationships.
Write checks rather than using
ACH payments. If the corporate is during a “cash crunch”, consider paying
vendors with checks. Although the ACH facilitates transaction processing, it
shifts cash control from the business owner to the seller.
Communication: Contact the seller
if payment can't be made consistent with the prescribed terms, and let the
seller know that payment could also be delayed. there's nothing more
detrimental to vendor relationships than a communication breakdown. Consider
sending the seller a daily partial “good faith” payment if full payment can't
be immediately made. Remember, Cash IS King.
Using company credit cards to buy
certain expense items can provide an additional 30 – 45 days to the expense’s
normal payment term. Be sure to pay all of the MasterCard balances by their
maturity to avoid costly finance charges.
Review all vendor terms within
the Online Bookkeeping
Services in Charlotte to make sure that vendors aren't paid prematurely.
Taking advantage of a vendor’s
early pay discount (ex. 2/10 net 30) provides a big annual return of 36%, but
make sure that sufficient cash reserves are available for this investment.
Credit Line: plan to secure a
bank credit line to assist bridge gaps caused by record items that are
temporarily out of alignment (ex. AR).
Kayabooks features a team of
execs experienced in income planning and management for small to mid-sized
Created on Feb 17th 2021 00:48. Viewed 423 times.