Managing cash flow

For optimal cash management, executives must forecast cash requirements
of their business plan and contemplate possible adverse business scenarios, such
as the inability to meet current financial
obligations or the loss of a major customer.
Anticipating such threats helps CEOs prioritize expenses, objectively evaluate current business investments and explore
alternate financing options, says Dan
O’Connor, tax partner with Haskell &
White LLP.

“I’m hearing from many of my clients that
cash management is becoming more
important,” O’Connor says. “If they’ve been
through a recession or credit crunch
before, they know it’s a time for tough decisions. But, it also provides the opportunity
to reassess fundamentals and find creative
ways to finance growth.”

Smart Business spoke with O’Connor
about the ways that CEOs can manage
cash and survive more volatile economic

What are the fundamentals that help
increase cash flow?

Certainly, reviewing expenditures with
the goal of slowing down your outgoing
payments will ease cash flow problems,
and it’s an opportune time to eliminate any
nonessential expenses. One of the most
critical exercises is preparing a cash flow
budget. Predicting cash inflows and out-flows on a month-to-month, weekly or
daily basis can help you foresee your business cash flow gaps or any periods when
cash outflow may exceed inflow.

Also, during times when it is more difficult for your own business to secure credit, it’s important not to be too liberal in your
credit policies with your customers.
Review your collections policies and days
outstanding and place late-paying customers on a payment schedule. Consider
offering incentives for faster payment or
charging interest on outstanding balances.
Review credit ratings on new and existing
customers to determine their creditworthiness and ask for more retainers and
upfront fees to free up cash and reduce
exposure to bad debt.

What are some traditional and nontraditional
ways to secure financing in a tight lending

There are sources of cash and financing
that can help you continue the growth of
your business when traditional business
loans are hard to come by. Here’s a short
list of options:

  • Line of credit: A growth company that’s
    profitable is the best candidate for this type
    of short-term loan, which can smooth out
    the timing of business cash flow needs. If
    you don’t need to make capital purchases
    for items such as equipment but you need
    to advance material and labor costs for
    new orders, this may work for you.

  • Investment capital: If you aren’t quite
    eligible for a bank loan or you need more
    than a bank is willing to lend, consider
    bringing in an equity partner. By selling off
    an interest in the business for cash, you
    can continue growth, investment and profitability.

  • Factoring: This is receivable-based
    lending where you actually sell your
    accounts receivable to a factor [a type of
    lender], which collects the money. You get
    only a percentage of the invoice until the
    principal is paid, and interest rates are
    higher than normal.

  • Mezzanine financing: Often used in real
    estate transactions, this type of gap financing helps fill up the shortfall between what
    banks will lend and the equity required for
    a project. The loans will tend to be at higher interest rates and are secured by partners’ interests in the company.

What are some short-term strategies for
improving cash flow through increased

Certainly, when cash is tight, you want to
look at reducing inventories, so offering
concessions to customers can be an effective strategy. If you can’t sell the inventory,
consider leasing it or offering lease-to-buy
options as a way to increase cash. For
example, homebuilders may not be able to
sell inventory despite offering concessions,
but leasing the homes will help make the
loan payments, and doing so offers tax

What are some managerial strategies for
surviving a cash crunch?

If you run short of cash, here are some
tips to help you get through:

  • Do be very transparent in your communications with employees and vendors.
    If you will be paying vendors more slowly,
    let them know when they can expect payment and how much to expect.

  • Don’t put off paying taxes, including
    payroll taxes. You can slow down some
    payments, but you must pay your employees and your tax obligations on time as
    well as your rent and utilities. If you need
    certain products or services that are critical to manufacturing, you want to continue
    paying those vendors promptly.

  • Do use your accountant as an intermediary who can help negotiate or renegotiate more favorable lending terms or larger
    loan amounts. Your accountant can speak
    to the financial strength of your business
    and your balance sheet and can speak in
    terms that will both allay lenders’ concerns
    and highlight your business’s potential.

DAN O’CONNOR is a tax partner with Haskell & White LLP.
Reach him at (949) 450-6200 or [email protected].