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August 14, 2018

Small Business Advice

Cash Flow Management

Gray Poehler | 10/30/2017

Q: My records indicate my business is growing and making money, but the balance in my checking account is barely sufficient to take care of monthly expenses. What is my problem?

A: You say your business is growing as is reflected on your balance sheet (i.e., assets versus liabilities.) In the most general terms, assets are things that you own. Liabilities are things that you owe. Just because your assets are more than your liabilities does not necessarily mean you are in good financial shape.

Assets can be broadly categorized into short-term (or current) assets, fixed assets, financial investments and intangible assets.

Current assets are short-term economic resources that are expected to be converted into cash within one year. Current assets include cash and cash equivalents, accounts receivable, inventory and various prepaid expenses

Fixed assets are long-term resources, such as plants, equipment and buildings.

Financial assets represent investments in the assets and securities of other institutions. Financial assets include stocks, sovereign and corporate bonds, preferred equity and other hybrid securities.

Intangible assets are economic resources that have no physical presence. They include patents, trademarks, copyrights and goodwill.

Of these four asset classes, only cash and those financial assets that can quickly be converted into cash, like stocks and bonds, can be considered “liquid assets.” Accounts receivables or money that is owed to you for products sold or services rendered are not liquid until you receive payment.

A healthy cash flow is necessary for the success of any company. Here are several tips you may find useful:

  • Plan ahead to anticipate cash shortfalls. Create a budget that predicts the months ahead for both expected income and expenses. A good rule of thumb is to have 6-12 months cash on hand.
  • Accelerate accounts receivables by establishing payment terms agreed upon at point of sale. Require down payments and age your receivables to track outstanding invoices. Accept credit card payments and consider a modest discount for payment in full within 30 days.
  • Negotiate favorable terms for accounts payables or money that you owe others. Look for the best ways to schedule orders and payments for inventory and equipment to coincide with peak cash flow months.
  • Explore short- term funding options with your bank. Establish a line of credit to be used in emergencies that will enable you to always pay your bills in a timely fashion.

Your local SCORE counselor can assist you to develop a viable cash flow management plan.

Gray Poehler is a volunteer with the Naples Chapter of SCORE.

A SCORE counselor since 2005, Gray Poehler owned and operated an independent insurance agency with 20 employees and two locations. He has earned the Certified Insurance Counselor designation and is familiar with both personal and commercial property and casualty insurance. Areas of expertise include: Business Finance and Accounting; Business Strategy and Planning; Business Operations; Human Resources and Internal Communications; Sales, Marketing and Public Relations.

To learn more about management issues of small businesses, contact the SCORE office nearest you.

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