How You Can Manage Your Business' Cash Flow Effectively
by Dr. Jeffrey Lant
If you're running a business, here's something you can never
afford to forget: cash is king!
Cash is the lifeblood of every business no matter whether
it's a multi-billion dollar conglomerate or a start-up
business. You've just got to have it. Problem is, as recent
events surrounding (still a billionaire?) Donald Trump's
financial difficulties confirm, even financially savvy
individuals are not immune to negative cash flow problems.
In today's uncertain economy with fluctuating interest
rates, more bank failures and rising prices, no wonder small
businesses owners who have limited financial training are
having problems staying alive, let alone prospering. In
fact, 63% of new businesses don't survive six years. And one
of the main reasons for business failure is poor cash
management. Too many business owners neglect their cash flow
until it is too late to recover. Then, hey presto, they're
history!
So, the Big Question is: are you managing your business'
cash effectively? If you're not sure, then you probably
aren't. One way to find out what you should be doing is to
follow the advice of my friend, cash management guru Les
Mansonson, president of Monroe, New York-based, Cash
Management Resources. He's the author of a superb new book
aptly titled Cash, Cash, Cash: The Three Principles Of
Business Survival and Success. Les, whose firm offers cash
management consulting and training to businesses, gives you
step-by-step details on how to manage your company's cash
flow more effectively, if you're still a mom-and-pop
operation or if you're a covert operative for that shaky
billionaire Trump.
Les, who also authors the Cash Management Performance Report
newsletter, told me he wrote Cash, Cash, Cash "to help
business owners maximize their company's cash flow. That
means," he told me sternly, "getting the money from
customers sooner, paying bills the last possible moment,
concentrating money to a single bank account, managing
accounts payable, accounts receivable, and inventory more
effectively, and squeezing every penny out of your daily
business."
Collect Your Money Faster
Okay, we all want to do what Les suggests, so how do we do
it? What steps should you take to collect your money faster?
According to Masonson, a Certified Cash Manager, you can
start with these four steps:
1) Try to speed up customer orders by having customers fax
you their orders.
2) Send out your invoices the same day goods are shipped,
not a week or two later.
3) Indicate on your invoice when payment is due, and specify
the penalty interest for late payment.
4) Consider using a bank lockbox (post office box
strategically located near customers to reduce mail time) to
collect your mailed checks from customers across the
country. Your lockbox bank picks up mail around the clock
including weekends, processes the checks and credits your
account. Note: lockboxes are particularly valuable for
businesses grossing over $25 million annually.
Deposit Your Checks Faster Than A Speeding Bullet
Many retail and service businesses receive checks in payment
for their services. Once you receive checks you must deposit
them in the bank, or they don't help your cash flow. Sounds
obvious, right? Here are six sure-fire suggestions that Les
gives for getting the fastest availability (i.e. use of your
money) on deposited checks:
1) Always deposit all checks the same day they are received.
Don't hold checks until the next day because you lose one
day's float. Key point: you can lose three days of float by
not depositing Friday's checks until Monday.
2) Obtain availability of 0 to 2 days on deposited checks.
Don't let the bank give you the consumer availability of 1
to 5 days. Be persistent. Ask the bank for its "availability
schedule" and scan it to be sure you're receiving fast
availability of two days or less.
Be aware that each bank has its own "availability schedule".
This is used to assign check availability to consumers,
business (commercial accounts), and large corporate
accounts. Availability is the number of days until you can
use the money deposited by check as cash. For example, a
$1,000 check deposited today and assigned a one-day
availability can be withdrawn as cash tomorrow.
3) Don't deposit checks in a bank's Automated Teller Machine
or use the Night Depository since you have no evidence that
you actually deposited the checks you said you did.
Remember, you only receive a receipt that shows the time and
dollar amount of the deposit at the ATM, and you get no
receipt at the Night Depository.
4) MICR Encode your customers' checks (using a machine that
prints magnetic ink on the bottom of the check) with the
dollar amount before depositing them in the bank if you
deposit over 500 checks a month. Banks charge 3 to 5 cents
less for each encoded check. Used encoding machines cost
about $1,500. (Check your Yellow Pages under bank equipment
for dealers.) Besides saving money, you may get another
benefit: faster check availability.
5) Ask your bank its deadline for receiving availability on
deposited checks. Some banks may require a deposit of an
encoded check by 2 p.m., even though the bank is open to 5
p.m. Make sure you make this deadline, otherwise you lose
one day's float.
6) Before using a bank's ATM for check deposits find out the
bank's availability deadline. Some banks have a 12 noon cut-
off time which means that any checks deposited later are
considered to be deposited the next day!
Develop Tight Accounts Receivable Policies
Too many businesses neglect their accounts receivable until
bills are uncollectible. This is a costly mistake according
to Masonson. Here are seven of his typically sensible
suggestions:
1) Check the financial health of new customers before
offering them credit. One way to do so is by using a rating
service like Dun & Bradstreet (800-234-3867).
2) Ask a new customer for five business references and call
them!
3) Don't offer too generous discounts such as 3% for payment
in 10 days. Les suggests that a better rate is 1.5% cash
discount. It costs you less.
4) Charge a "late fee" of 2% per month to customers who pay
late and charge back customers who take discounts after the
discount periods.
5) Follow up on late payers with phone calls and letters.
Yes, Les suggests the first letter should go out the very
day the amount is even one day late!
After 30 days overdue, start implementing this sequence:
-- send out a letter from your attorney
-- turn over the account to a collection agency
-- use a collection attorney.
6) Don't send out new merchandise if bills remain unpaid.
Remember that bad debts hurt your bottom line! Be vigilant
and try to get at least periodic payments from slow payers.
7) Instruct your bank to automatically deposit "returned
checks" (e.g. insufficient funds). Ask your bank if they
offer the Return Item Lockbox service. If they do, then use
it to redeposit your check and charge back the bank return
item fee to your customer.
Disburse Your Money Slowly
The cardinal rule of disbursing your money to vendors is
Don't Pay Early -- unless you get a discount of at least
1.5%. Les told me that too many small companies pay their
invoices early just to get rid of the paperwork. "That's
poor cash management," asserts Les. To slow down your
disbursements consider Les' five suggestions:
1) Pay your invoices on the last day they're due, not
before.
2) Try to mail your payment on Thursday or Friday to pick up
a few extra days extra mail float over the weekend.
3) Use business credit cards or charge cards for travel,
lodging, meals, and small expenses for yourself and your
employees. With credit cards, you typically don't have to
make payment until 25 days after receiving the statement.
Use this float by investing the money. In total, you can
typically keep your money invested for 45 days from date of
purchase.
4) Don't issue cash advances to employees. Have them use
their personal credit cards or business cards, if you
provide them.
5) Consider setting up a remote disbursement checking
account in another state to extend the check clearing float
by at least a day. This practice is used very successfully
by 17% of large companies, according to Les. The downside of
this practice is that some vendors may complain about their
delayed availability on their bank deposit. But this can be
overcome by mailing them their checks one day earlier.
Many small businesses, says Masonson, neglect to reconcile
their monthly bank statements or assume that the bank never
makes a mistake. You must stay on top of your disbursements
to control your cash flow. If you're one of those people who
can't stand reconciling your bank statements, Masonson
suggests using a bank's standard account reconcilement
services for a low monthly price -- $30 to $70 base charge
and 5 to 7 cents a check. When is it best to use a bank's
reconcilement service? Les recommends using a bank when:
1) you have a monthly check volume of at least 500 checks
2) you need specialized reports
3) you are currently performing reconcilement manually
4) you can't find software at a reasonable price or that
meets your needs. Companies offering accounting software
include DacEasy, Inc (800-877-8088); Real World Corp (800-
678-6336) and Peachtree (800-247-3224).
5) you don't have either a PC or large computer system
6) you have no staff or time available.
Don't Leave An Extra Dime In Your Bank Account
According to Masonson, who has saved clients over $50
million in cash management improvements, many businesses
unknowingly keep too much money in their bank accounts to
pay for bank services. This money could be used more
effectively elsewhere -- such as to pay off a loan or to
invest at a more competitive rate. Many businesses have no
idea how much money to leave in the bank or what
alternatives they have to compensate the bank.
Les told me that when he was recently on a radio show and a
caller told him he kept $30,000 in his checking account,
Masonson asked why. The caller didn't have an answer! (We
should all have this problem!!!)
Get An Account Analysis Statement -- Pronto
How do you know how much money (bankers refer to this as
"balances") to leave in your checking account to pay for the
bank's services? That's a question that more business owners
should be asking themselves.
1) First, get a price list which shows how much your bank
charges for services like account maintenance, checks
deposited, checks paid, stop payments, and wire transfers.
2) Ask the bank to send you a monthly "Account Analysis
Statement." The analysis statement contains the average
balance levels for the month -- both the ledger and
available balance -- as well as a listing of services used,
their transaction volumes and cost. This statement should be
obtained in addition to the regular monthly bank statement.
3) Look at the account analysis to see whether you are
overcompensating the bank. Then pull out any excess funds
and invest them in a high yielding money market mutual fund,
for example.
Les points out that smaller banks may not know what you are
talking about when you ask them for the account analysis.
Large banks may offer this statement -- but you generally
have to ask for it! Also, says Les, "Don't let the bank
charge you for this statement since it is really an
invoice."
Watch Your Inventory -- It's Actually Tied Up Cash
Having too much inventory can cripple your cash flow. Don't
forget that inventory is cash sitting on your shelf. To
minimize your cost of inventory, Masonson has these six
recommendations:
1) Forecast by day, week and month what you expect to sell
for each item stocked.
2) Determine which items account for 80% of your sales.
Minimize ordering other items that are selling poorly or
infrequently.
3) Determine how fast you can get inventory once you order
it. Try to order as late as you can. Some firms can use
"just-in-time" inventory which enables them to receive their
order the day the need it.
4) Determine your economic order quantity and don't order
too much inventory just to save a few pennies.
5) Shop around and make sure you're getting competitive
prices.
6) Develop a policy for determine obsolete inventory, and
how and when to get rid of it.
Conclusion
As the credit implosion of the '90's widens, the ascendancy
of cash-on-hand will accelerate. If you can get your cash
faster -- and disburse it more slowly -- you'll prosper. If
you can't, you're going to suffer. Frankly, I'm doing
everything I can to limit credit, get my money quicker, and
decrease my exposure, and I'm grateful for Les Masonson's
intelligent advice on how to succeed with each objective.
Now you can benefit, too, with his just published 304-page
book CASH, CASH, CASH. It provides hundreds of practical
tips on managing cash and effectively dealing with banks.
Get it and keep it right next to your accounts receivable
ledger!
**********************************
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offering you over 130 ways to make your business more
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***********************************
Dr. Jeffrey Lant is well known as the author of such books
as CASH COPY: HOW TO OFFER YOUR PRODUCTS AND SERVICES SO
YOUR PROSPECTS BUY THEM... NOW! ($27.95 postpaid) and the
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PEOPLE WHO NEED WHAT YOU'RE SELLING AND MAKING SURE THEY BUY
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