Business owners have to focus on sales, profitability, innovation, employee matters and more. But if cash management falls down the priority list, it can get your company into trouble.
Business owners may count on a controller or CFO to monitor the situation, but it’s not uncommon for bad news to be delayed. Other owners hide bad news from lenders, hoping things improve. Keeping your bank informed is important, yet business owners can struggle with what to say and when to say it — but generally, it’s best to share more.
“Cash management is a contact sport. You can’t leave it to chance,” says Mike Klein, CPA, MBA, partner in Audit and Accounting Services at Ciuni & Panichi. “If you’re generating profit, where is the cash? Is it sitting in accounts receivable where you can’t spend it?
Smart Business spoke with Klein about his cash management advice.
How should business owners use the balance sheet to support cash management?
Your reporting dashboard should include metrics like total cash position. Also, look at key ratios on the balance sheet, like days in receivables, days in payables or days sales in inventory, in a timely fashion. Then, drill down. Are those ratios trending favorably or unfavorably, and what’s behind the change?
What helps ensure customers pay on time?
Bill quickly, with a short lag from the time you deliver a service or good to the time you invoice. Getting the clock started is especially important with large enterprises where you have limited influence on how they pay. In some cases, you can negotiate sales terms. If cash is tight, incentivize customers to pay faster with discounts. Also, are you making it easy, with many ways to accept payment?
Encourage your employees to build relationships with accounts payable personnel. Customers will be less likely to stall payments to people they know. Also, if you know when they cut checks, you can time your invoicing to be included in the check run.
Understand your leverage: Can you stop delivering services or go to cash in advance? Business owners may hesitate to take these tactics, but a customer that doesn’t pay isn’t a customer. Be realistic in assessing credit quality and risk. Set formal policies for how much credit to extend. Are your salespeople making good decisions? No one likes to turn away business, but it doesn’t do you any good if it’s profit that doesn’t turn into cash.
If you’ve got large receivables, consider buying credit insurance to help manage risk.
How can owners right size their inventory?
To an extent it’s possible, you need good sales forecasts, which inform the inventory levels and production schedules. Also, set safety stock levels to provide order points. Make sure your inventory and purchase managers are evaluated against metrics and consider incentivizing them where needed to get inventory down.
Cycle count the inventory. If accounting records are out of line with the warehouse, it’s tough to make good decisions. Maybe people know the system isn’t accurate, so they keep excess inventory to hedge. Or, if inventory starts disappearing, investigate to see if fraud might be occurring.
Know your suppliers. What are their delivery schedules or flexibility to meet last-minute demands? Do you have multiple sources? This can help keep inventory lower.
Again, monitor the key ratios, and benchmark them against industry leaders and your past performance.
Where can accounts payable be improved?
Negotiate terms where possible — try to minimize your cash gap. If you collect receivables in 90 days and pay vendors in 60 days, that’s a 30-day cash gap. The cash gap is funded through a line of credit or reserves. With external funds, you pay interest and as rates rise, it costs more. With reserves, there can be opportunity cost. You may not be able to start a new project or innovation because your reserves are funding receivables.
Multiple suppliers may give you leverage when negotiating payment terms. With so many moving parts, you can influence some more than others. Be efficient with what you can manage, and plan for the things that you can’t. So, if a big box store won’t pay for 100 days, know where you’ll get the cash to float the difference — that’s why relationships with bankers and suppliers are important.
Insights Accounting is brought to you by Ciuni & Panichi, Inc.