Cash management

Managing cash-flow effectively is a crucial component to the success of any business. Not only does the monitoring of profits pave the way for meeting normal cash obligations, but effective management of receivables, payables and inventory also can safeguard against unanticipated problems.

The goal, of course, is to achieve a positive cash flow, which requires a sound strategy. For instance, cash reserves can be increased by accelerating the collection of accounts receivable. The fact that cash availability decreases when balances are past due underscores the need to actively manage accounts receivable, says Pete Gautreau, a partner at accounting firm Vicenti, Lloyd & Stutzman LLP.

“Managing receivables is critical to cash-flow management — it might be the single most important thing,” he says.

Smart Business spoke with Gautreau about how cash flow should be measured, what steps should be taken if an unexpected shortfall occurs and why rapidly expanding sales doesn’t necessarily correlate to instant riches.

How can a business most effectively manage its cash flow?
By understanding how cash relates to a variety of factors in a business, not just the bottom line. It’s operational and financial efficiencies that are the keys — management of inventory and receivables and payables directly effect cash flow.

How should cash flow be measured?
Measuring implies looking back at a point in time. When we talk about the importance of cash flow management, we emphasize the need to project cash flows. When relationships are properly understood, one can develop a model which will quantify the future affects on cash under a variety of scenarios. Such a model can illustrate how cash flow is actually influenced, giving managers the opportunity to recognize keys, even if they don’t necessarily understand the math.

How far in advance should cash flow projections be made?
They should be made for the purpose of both short-term and long-term planning. Depending on the severity of current cash shortages, weekly rolling cash flow schedules might be very beneficial — if nothing else to ensure that payroll can be covered. But even healthy companies need to look forward, at least a year. Those in the growth mode should project beyond that knowing that it won’t be business as usual in the future.

If an unexpected shortfall occurs, what steps should a business take?
Once an unexpected shortfall occurs, damage control becomes the priority. Relationships with vendors and lenders are at stake, and it’s best to be upfront with these partners. Bad news doesn’t get better with age.

Again, the key is to project and expect these things. Contingency plans can be developed to elude shortfalls before they become imminent.

How can a business improve its cash flow by effectively managing receivables?
Most businesses need to tighten up their credit practices with both existing and new customers. I always advise a business to put a manager in charge to be personally responsible for cash collections. Many businesses will allow customers 45 days to pay before they even start sending out statements and past due notices. Get on the phone and talk to your problem customers frequently.

What are some tips for managing payables?
With payables you have a bit more control. Pay invoices when they’re due and not before. Don’t necessarily jump on early-pay purchase discounts. Businesses should understand the cost savings associated with discounts and weigh that against the advantage of holding on to cash as long as possible.

Also, strengthen supplier relationships. They can be a great source of financing, especially for businesses that are cyclical in nature.

For a fast-growing company, how does expansion affect cash flow?
Fast-growing companies can be the most susceptible to cash flow problems. As sales grow, so do expenses. They need to be monitored closely and kept in check.

Capital acquisitions and maintenance requirements might outpace profitability. Inventories and receivables will grow and tie up cash. Income taxes will be coming due. Again, it gets back to anticipating these dynamics. Work with your CPA, lending partners and insurance providers. Use their expertise to develop future expectations and formulate remedies for potential shortfalls.

Pete Gautreau is a partner at accounting firm Vicenti, Lloyd & Stutzman LLP. Reach Gautreau at (626) 857-7300 or [email protected]