cash flow for small business ownerss3.amazonaws.com/.../cash-flow-for-small-business-owners.pdf ·...

A Guide to StrengtheningCash Flow forSmall Business OwnersCash fl ow management is key to enjoying increased sales and

revenue. This ebook highlights several ways to strengthen the cash

fl ow of your small business and increase your working capital.

Cash Flow Management:What You Can Do to Boost Cash Flow

If you ask small business owners what’s the most important factor in their success, most will probably say growing sales or boosting profi ts. After all, more salesequals more revenue, and higher profi ts means increased opportunities andfi nancial freedom.

There’s no question that sales and profi ts are critical to business success. But there’s another factor that’s just as important, if not more so: cash fl ow. Without strong cash fl ow, even successful businesses with growing sales and revenue can runinto trouble.

In this ebook, we’re discussing strategies and solutions that strengthen cash fl ow in small businesses.

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Understanding the Cash Flow Cycle

The fi rst step to improving your cash fl ow is understanding your business’s cash fl ow cycle. This is the movement of cash into and out of your business. Typically, there is a lag between the time when cash is disbursed to cover accounts payable and when it is received and deposited into the bank.

Let’s say you own a small business that manufactures wholesale leather goods. The cash fl ow cycle looks something like this:

This scenario often creates a cash fl ow gap as you wait for outstanding accounts receivable to be collected and deposited. It’s during this lag time that small business owners sometimes run into cash fl ow problems that can ultimately drive them out of business.

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Cash is disbursed to pay for raw materials, inventory and overhead (e.g., rent, utilities, payroll, insurance)

Next, products are manufactured, stored and sold to customers

In most cases, customers are invoiced and given anywhere from 30 to 60 days or longer to pay, which creates accounts receivable

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Shortening the Cash Flow Cycle

When you understand the cash fl ow cycle, you can see that one of the biggest keys to improving cash fl ow management is shortening the cycle and thus shrinking the cash fl ow gap. There are two main ways to do this:

• Accelerate collection of your accounts receivable

• Stretch out disbursement of your accounts payable

To accelerate AR collections, start by creating an accounts receivable aging report to track your outstanding receivables. This report will tell you at a glance which customers are past due in their payments, how late their payments are and how much they owe. With this data, you can prioritize your e� orts to focus on collecting the largest amounts due fi rst as quickly as possible.

It’s important to be proactive when it comes to collecting receivables. Act quickly to follow up on late payments — the longer they drag out, the more your cash fl ow is hindered and the less chance you have of eventually collecting anything.

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In fact, it’s best to take steps to improve cash fl ow before receivables become past due. Strategies to implement include:

• Negotiate with customers for better terms, such as net-15 days instead of net-30 days, or net-30 days instead of net-45 days

• Collect a down payment for goods or services upfront, if possible

• Consider o� ering prompt-pay discounts, such as 2-10 net-30 (here, customers receive a two percent discount if they pay invoices in 10 days instead of 30 days)

The fl ip side of the cash fl ow coin is stretching out your accounts payable. Your goal should be to extend your payables as far as possible while honoring your negotiated payment terms. For example, if payment of an invoice isn’t due for 30 days, you will gain no practical benefi t by paying it in 15 days.

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Get Help From These Treasury Management Solutions

Many small business owners will tune out when they hear the term “treasury management” because they think it only applies to large companies. But there are numerous treasury management products that benefi t small businesses. These solutions include:

Online banking and bill pay. Conduct your banking online with secure, single sign-on access to your account.

ACH Credit Origination. When it comes to improving payables management, talk to your bank about how you can pay your employees, vendors and taxes automatically via ACH (Automated Clearing House) Credit Origination. This ensures that invoices are paid on the due date — and not a day sooner or later — thus eliminating the uncertainty of mailing checks and not knowing if they will arrive before or after the actual due date. ACH payments provide a host of other benefi ts as well, including lower costs, higher accuracy, increased e� ciencies and reduced payment fraud.

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Remote Deposit Capture (RDC). This is another e� ective cash management tool. Using a specially designed desktop scanner and software, Remote Deposit Capture enables you to transmit check images to your bank electronically right from the convenience of your o� ce. This could result in checks posting to your account much sooner than if you drive to the bank once or twice a week tomake deposits.

Wire transfers. These are useful when a high-dollar payment must be sent and received on the same day. Small business owners can initiate wire transfers online instead of having to visit or call the bank.

Merchant services. Customers today expect businesses to accept a wide range of payment types, including credit and debit cards. Merchant services from Cadence Bank enable you to take advantage of the latest payment processing products and services.

Positive Pay. This check fraud prevention tool is essential for small businesses. Positive Pay compares checks presented to the bank for payment to a list of checks your business has actually paid. All others are fl agged as suspect and reported to you (via email or mobile) for a pay or no-pay decision.

ACH Positive Pay. This is Positive Pay for electronic funds transfers. ACH Positive Pay guards against fraud for all ACH debits that post to your accounts by validating payments against a list of approved vendors and fi lters you set on your account.

Strengthen Cash Flow With These Tips & Tools

In addition to the above treasury management solutions, small business owners can optimize and maintain a healthy cash fl ow with the following strategies:

Establish a line of credit to limit debt. Tap a business line of credit in a fi nancial emergency, so you don’t burden your business with too much debt. Excessive debt can kill a small business.

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Use a corporate card to pay for purchases. Use it to pay for low-value items such as o� ce supplies as well as big-ticket items like machinery, equipment and raw materials. By using a corporate card to pay for these things, you enjoy an immediate 45-60 days of free credit and incur no interest if you pay the balancein full when it comes due. You may also rack up rewards points you can usehowever you wish. Be sure to ask vendors if they charge a fee to acceptcredit card payments.

Open a business savings or money market account. This is a good place to stash any excess cash balances that accumulate in your business checking account. You may earn a small return on the funds, but the real reason for opening a business savings or money market account is to have easy access to liquid funds in case you experience a cash fl ow shortfall.

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Hire a good CPA. Don’t try to cut corners and only use an accounting software program to handle your small business fi nances. You need an expert fi nancial and accounting advisor in your corner. Look for a good CPA with knowledge and experience in your specifi c niche. Inc.com has more information on how to fi nd a good CPA for your small business. And as your business grows, consider hiring an outsourced CFO on a part-time or as-needed basis. A CFO “for rent” will bring a signifi cantly higher strategic and analytical skill set to the table than a bookkeeper, accountant, CPA or even a controller, without the six-fi gure compensation package.

Build a great relationship with your business banker. The same thinking holds true with regard to your business banker. You don’t just want a transactional relationship with your banker, nor do you want to work with someone who is just an order-taker. Find a banker who understands small business needs and will collaborate with you to help you achieve your goals.

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Improve Liquidity Management With Sweep Accounts

Another key to strengthening cash fl ow is improving liquidity management. From time to time, you may have excess cash in your business checking account after all operational expenses have been paid. Your goal should be to manage this cash so it’s available when you need it while also ensuring that it is earning the highest return possible.

One solution is to create a liquidity management system that uses sweep accounts to move money back and forth among di� erent bank accounts once balances meet certain thresholds. These include:

An investment sweep account. This type of sweep account automatically sweeps excess cash in your business checking account into an interest-bearing account, like a money market fund or government obligation fund, when account thresholds are met.

A loan sweep account. This account automatically sweeps funds from operating accounts to pay down your business line of credit or other business loans. This will reduce interest expense while maintaining your line of credit for use in contingencies. Funds can be swept from the line of credit back to the operating accounts to cover checks that are clearing each day.

A combination sweep account. You can also use a combination sweepaccount as part of your liquidity management system. This tool will automatically sweep excess cash into interest-bearing vehicles to pay down loans based on predetermined percentages. You can choose whether to pay down any outstanding balances on your line of credit or invest any excess cashthat’s available.

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Implement any of These Solutions With Cadence Bank

Your bank will play a key role in helping you implement treasury management solutions for small businesses. Cadence Bank has helped many small business owners strengthen cash fl ow via CadencePay, a suite of treasury management solutions that gives small business owners several of the same conveniences and protections that large companies have access to.

Please contact us at 1-800-636-7622 if you would like to discuss cash fl ow management strategies and solutions in more detail.

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This e-book is provided as a free service to you and is for generalinformational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the e-book. The e-book is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes. Cadence Bank does not provide legal, accounting or tax advice to any client who receives services from Cadence Bank.

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