Business cash flow Featured

7:00pm EDT February 28, 2007

Periodically reviewing your cash flow projections will help you prepare for times when you’ll need additional sources of cash. Having good relationships established with banks, creditors and suppliers beforehand will help when you need a short-term business loan or the ability to access a line of credit.

“Business cash flow is one of the most important factors we look at when making a decision regarding a credit line,” says Alice Chen, senior credit analyst/Credit Team lead for Wells Fargo Bank, Houston.

According to Chen, a company may be profitable on paper but cash flow may still be negative: “The banker can help the company understand how it compares against others in its industry by examining its numbers against Risk Management Association ratios for similar businesses. These are the ratios we work with when determining whether to extend a line of credit, and for how much. Understanding the numbers will help a business determine where it might need to improve, and can help it obtain more favorable terms.”

Smart Business talked with Chen about ways companies can improve their business cash flow.

What is business cash flow?

By definition, business cash flow is the movement of money into and out of a business. It has been used to refer to net cash after operation in Uniform Credit Analysis (UCA), a cash flow model. It has also been referred to as operating cash flow as shown on the FASB 95 cash flow statement.

Bankers use the net cash after operation for their credit review process/analysis. We also watch the trends of net income and cash flow after operations for signals of potential problems. When cash flow after operation begins to lag behind net income, it’s usually a red flag.

Discuss the importance of understanding cash flow.

Here is a good example. Company ABC showed a pattern of consistent profitability and even some periods of income growth. For the last three years, net income for the company grew by 28 percent, from $15 million to $19 million. The company had consistently paid dividends and interests. One year later, the company filed for bankruptcy. Closer examination of the company’s financial statements revealed that it had experienced several years of negative cash flow from its operations, even though it reported profits. Sales reported on the income statement were made on credit, and the company was having trouble collecting the account receivables from its customers, causing cash flow to be less than the net income.

Is it getting easier, or more difficult, for companies to manage cash flow?

Easier, thanks to a wide variety of new technologies designed to help businesses make deposits faster, collect receivables faster, and more efficiently manage their banking operations overall. Combining a depository solution and payments processing solution at a single bank will usually speed up funding of credit/debit card payments. For example, Wells Fargo offers as-soon-as-next-business-day funding with a checking or depository account.

How can bankers help companies manage cash flow?

Managing cash flow means balancing cash inflow with cash outflow. Look for banks that offer a variety of cash management products to help customers in the areas of collections and disbursements and information, including, but not limited to, lockbox, payments processing, processing, cash management accounts, ACH collection, electronic desktop deposit, revolving lines of credit and other credit/treasury management products for business.

For example, a business owner can eliminate the need to go to a branch to deposit checks by using an electronic desktop deposit machine to deposit checks in his/her own office. Every check is imaged and saved. The data is then transmitted directly to the bank. This can help the customer reduce the check floating time and focus more on their core business. Customers can also request a revolving line of credit to help the cash flow during the collection period for accounts receivable.

How can a company finance business cash flow?

A line of credit can help a business during the times it is waiting to collect accounts receivables. When evaluating if a company is eligible for the line of credit, the bank always looks for a reliable measure of the borrower’s repayment ability. Cash flow becomes the bank’s primary focus when analyzing a company’s ability to repay the debt. Operating cash flow can be generated from the conversion of cash to inventory to receivables back to cash, which is also known as the short-term asset conversion cycle. Bankers review the conversion cycle closely to determine the borrower’s ability to generate cash and make a creditworthy decision. In addition, we can also use this information to help the company understand how to improve the cash flow.

ALICE CHEN is senior credit analyst/Credit Team lead, Wells Fargo Bank, Houston. Reach her at (832) 251-5531 or