Managing cash flow Featured

7:00pm EDT November 25, 2007

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 times.

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 market?

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 sales?

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 advantages.

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