Inadequate cash flow can cripple a small business. In fact, research shows that the insufficient management of cash flow can be pinned on as much as 82 percent of small business and start-up failure.
If you run a small business and are experiencing problems with cash flow, take a look at the advice of Fred Parrish.
Parrish is founder and chief executive officer of The Profit Experts and creator of The Profit Beacon, a new app that provides predictive analytics to help businesses make timely and smart decisions. Parrish is also author of “The Profit Mentality”.
How to Avoid Cash Flow Problems
Parrish, aka “America’s Small Business CFO”, provided Small Business Trends the following tips on avoiding cash flow problems at your small business.
Do Appropriate Planning, Constantly
According to Parrish, the real key to avoiding a cash flow crisis is to do the appropriate planning on a constant basis.
“To accomplish this, you as the business owner/manager must look at the profit and loss (P&L) and any other non-operational items (or circumstances) that specifically affect cash flow,” Parrish advises.
Take the Appropriate Steps to Manage Profit and Loss
Small business owners must take the appropriate steps to manage P&L. This includes, says Parrish, being “realistic about upcoming revenue opportunities and the timing of when they will be realized.”
Part of a solid profit and loss management strategy should include performing an analysis of all costs (direct and indirect) and how they are driven by revenue or other activity in the business.
According to Parrish, the “appropriate staffing level for the different stages of the company should also be determined” to help small businesses manage profit and loss adequately and help prevent running into cash flow problems.
A monthly forecast for at least one year should also be developed says Parrish, “starting with the line items in accounting reports.”
Create a Forecast for Future Cash Streams
Parrish also advises small business owners to create a forecast of future cash stream, “preferably weekly.”
“Developing an understanding about when revenues can be collected” is part of a comprehensive and effective cash flow, he says.
Think About the Timing of All Operational Cash Payments
Are you always aware of the timing cash disbursements will be made? It is wise for small business owners to, as Parrish says, “determine the timing of all operational cash disbursements.
Other disbursements should also be identified, such as owner distributions, principal payments on debt and capital expenditures.
Parrish advises small business owners to subtract the disbursements from the receipts to determine cash balances for each future period.
“Update the information as conditions change in the business or the market that will influence the outcomes to maintain a realistic view of the future,” he told Small Business Trends.
Carry out a Comparative Analysis
According to Parrish, small businesses must do a comparative analysis (compare the actual results to the forecast) to determine where the company is not performing as expected, in order to gain a better understanding about what actions should be taken to ensure an optimal outcome.
Parrish warns that: “No forecast is perfect and you can always come back to adjust any items that look to be incorrect. This will not be as painful as it sounds. Start with what information you have and refine the process over time.”
Focus on Proactive Planning
The veteran CFO and author also told Small Business Trends that proactive planning is the key to avoiding a cash flow crisis and the symptoms or warning signs.
According to Parrish, small businesses can avert running into a cash flow crisis by proactive planning and avoiding the following:
Cash Discounts Being Missed
The returns on cash discounts far exceed most returns on any other use of cash.
Vendors Being Stretched Beyond Normal Payment Terms
Parrish warns small business owners: “If this situation is allowed to persist for too long it will irreparably damage these relationships and could impede the business from acquiring the necessary items to operate.”
Late Fees Being Incurred on Lease Payments or Trade Accounts
“In a similar way as cash discounts, the effect of these penalties can far exceed the normal costs of traditional financing arrangements,” says Parrish.
Age of Your Accounts Receivables Increasing or Increased Difficulty in Collecting Accounts
Unfortunately, most managers do not attempt to manage A/R with more than a passing thought until there is a problem with cash or a question arises regarding the validity of the recorded balances, Parrish says.
“You must have a sustained effort to manage A/R in place at all times. Uncover any issues that impair the ability to collect all amounts billed and develop a plan for working through each to a successful conclusion,” says Parrish.
He says this plan should include:
- Billing promptly and as often as possible.
- Collecting all payments as and when due.
- Eliminating all barriers to payment at the outset.
- Providing all documentation necessary to facilitate payment at the beginning of the process.
- Aggressively following up on overdue invoices.
- Not working only the old accounts. (If you focus only on the older accounts, you ensure that you will always have older accounts. Working the more current accounts allows you to collect them before they become old.)
- Staying on top of the situation.
Parrish advises all small business owners ask themselves:
“Who would you pay first — a vendor who is sending invoices on a consistent schedule with full supporting documentation who is very diligent in contacting you to determine the status of a timely payment, or a company that sends invoices from time to time with little explanation and no follow up?”
Increase Scrutiny of Operating Expenses
There are numerous reasons why a business owner will incur debt. Most are perfectly valid. However, there are times when business owners will take on debt in the hope that it will buy enough time to repair a damaged business or to prop up an inability to gain revenue traction in a particular market.
To avoid this, Parrish advises:
“Increase scrutiny of operating expenses, liquidation of under-performing assets or outdated inventory, and carry out an unbiased evaluation of staffing requirements”.
Avoid Filing Delays in Deposits of Payroll or Other Taxes
Parrish says filing delays in deposits of payroll and other taxes should be avoided at all costs.
“The penalties can be severe,” he sats. “Once this path is taken, it’s a dangerous slippery slope.”
Are you a small business owner who has successfully overcome cash flow problems? Is so, share your experiences of running into, avoiding and overcoming issues related to small business cash flow.