“When you’re looking for cash flow management, you’re trying to control the things that take up your money, which would be accounts receivable, accounts payable and inventory,” says Carol Scott, vice president of business, industry and government for the American Institute of Certified Public Accountants.
It may seem like a basic business concept, but Donny Woods, president of the National Society of Accountants, says you’d be surprised how many people don’t take business basics seriously.
“A lot of folks spend money, but they don’t pay attention to their financial statements, or they don’t pay any attention to their cash flow analysis they should be getting on a daily basis,” he says. “They just spend money. Unfortunately, then when they get to the accounting, we find that they’re in real trouble.”
To avoid getting your business into a situation like that, start by creating a financial plan.
“Good planning is the best thing you can do for any cash management policy — knowing what your bills are, having a budget, having a forecast and planning things out to know where you are at any point in time is very important,” Scott says.
With your accounts receivable, it’s important to process invoices daily — the sooner you get the invoice in the mail, the quicker it’s in your clients’ hands and the faster you receive your money. Aggressively pursue past-due accounts, and if you don’t have a credit policy or collection policy in place, work with your accountant to create these.
“[The] squeaky wheel gets paid, so having a very aggressive pursuit at past-due accounts is important,” Scott says.
When it comes to your accounts payable, you want to hold on to your money as long as you can. Scott suggests negotiating favorable terms with your vendors.
“If you can negotiate terms like ‘30 days after receipt of goods,’ it’s more advantageous than ‘30 days from shipment day,’” she says. “Looking at what you can negotiate with your vendors is good.”
Another key to good cash flow management is monitoring your inventory levels. She says it’s important to find a balance so you’re in a just-in-time mode.
“You don’t want much of it, because it sits on your shelf and doesn’t earn you money, but you don’t want to have too little of it because you don’t want to lose sales,” Scott says.
When it comes to cash flow, you also have to keep great records.
“A lot of people write checks and give you nothing but the name of the payer or payee and the amount, and they don’t give you any information about that check,” Woods says. He says you can never give your accountant too much information.
“They should be keeping not only a good check register, but they should be keeping receipts, and a lot of clients don’t do that,” Woods says. “Particularly, smaller clients view the check as the ultimate record. That is not the ultimate record. The ultimate record is the receipt. That is the proof. That is the information about what took place in the transaction.”
Beyond just keeping track of your receipts, Woods says you have to makes notes about what those receipts are part of in the bigger picture.
“Those receipts are not self-explanatory,” he says. “If I get a utility receipt, I know what that is, but how about if I get a receipt from someone for supplies? Maybe all it says is supplies or it’s a service of some kind, and it’s not readily identifiable on the receipt what kind of service is.”
He says this is particularly problematic when it comes to companies using consultants, contractors or freelancers. Companies may submit receipts for these services, but he needs far more information, such as is that person incorporated or not? That determines whether or not he issues a 1099 form to them at the end of the year.
“Those are the kinds of things I have to educate the client about so that we can make sure that they comply with all the federal regulations and state regulations,” Woods says.
While creating a better cash flow comes down to a lot of internal practices, Scott says it’s also important to watch external factors and plan for how it could affect you internally.
“You have to do alternative scenario planning,” she says. “What happens if this happens? What happens if that happens? Staying on top of what’s going on in the economy in general is very important because there are unforeseen things that could happen.”
For example, right now energy is very expensive, and that will ultimately affect your cost of goods because your vendors will have higher shipping charges, so staying on top of the economic outlook is crucial. The AICPA provides a quarterly economic outlook survey that can help you with that.
As you look at all these different factors, it’s important to not try to figure it all out on your own. Instead, use your accountant as a resource to help you navigate these waters.
“They should be asking what are the best practices in various companies that their accountants see as far as days in receivable, collectability, inventory management, those types of things — what are best practices that they can follow?” says Don Misheff, Northeast Ohio managing partner for Ernst & Young LLP.
He says it’s not necessarily a daily discussion you should be having, but the experts agree that it’s not a once-a-year conversation either. Depending on the size of your organization, it could range from monthly to quarterly to even semiannually. By having these conversations and seeking out expert help, you can improve your cash flow and, ultimately, your business’s overall strength.
“Cash flow is the lifeblood of any company,” Misheff says. … “Cash flow and cash management — the companies that do it great survive tough times. During a recession, you see the good ones strengthening their balance sheet with cash reserves and managing debt levels.”