Cash Flow Management

Cash Flow Management

Presented by: Frank Coker

CompTIA Faculty

CEO, CoreConnex, Inc.

What is Cash Flow Management?

It’s all about Alignment(think wheels on your car)

What should you do if you have a problem?

Worst Actions• Go faster• Go off-road• Fast in the

curves• Over-inflate• Under-inflate• Ignore

Best Actions• Slow until fixed• Avoid curves• Use straight

roads• Monitor tires• Keep right

pressure• Fix alignment

Why do Small Businesses Fail?

• Reason # 1 – motivation - the owner gives up.• Reason # 2 – resources - cash can’t keep up

with growth.

What is the ideal?

Healthy Cash Flow- growing revenue

- growing cash balance

Unhealthy Cash Flow- growing revenue

- falling cash balance

Required: must monitor monthly trends

How Does it Work?

Ideal Cash Balance

Average Cash Balance + Available Line of Credit > 2x Average Monthly Revenue

• Average Cash Balance = average month-end balance after routine monthly payments are made for the most recent 3 months

• Available Line of Credit = bank line of credit and company credit cards minus any credit balances

• Average Monthly Revenue = average total monthly revenue for the most recent 3 months

Average small business has < 1x Average Monthly Revenue + LOC“Living on the edge”

Cash Management Process

Tactical (cope with wheels that are out of alignment)

• Prioritize bill payment• Collect receivables• Reduce costs• 30 day cash plan

Make ends meet

Strategic (keep wheels in alignment; plan a destination)

• Adjust prices– Lower to increase volume– Higher to increase margin

• Set/track goals• 90 day cash plan

Achieve goals

Before the Sale

• Set the correct Price– Research– Strategize your value-add– Don’t be afraid to lose some sales

• Up Front -- Don’t do Business with a Customer if you aren’t sure they can, and will, pay– Dun and Bradstreet– Ask for Financials– Ask Around

• Don’t continue doing business with Customers who don’t pay

Getting Payments from your Customers• Nemesis for many Small Business Owners

– Expect Prompt Payment - Have the Conversation – Invoice immediately when service rendered

• Charge for Overdue Accounts .. 1-1/2% per month overdue after 30 days is standard – On invoices, state payment due immediately or within 10 days,

not 30

• Start a new Overdue Account policy, notify your customers – and do it!

• Be creative with customers,e.g.,partial payments• Bank Regularly

Controlling Receivables

• Terms for projects and large hardware/software purchases:– Advance Payments/Up-front Deposits– Direct Payments b customers to Manufacturer/Distributor before

shipment– Progress Payments

• Terms for Managed Services– Payment for Month in Advance– Deposits

• Retainers for T&M?• Software development … funded by customer?

Collections

• Expecting prompt payment up-front is best

• You have to be the collector– Collection Agencies– Factoring

• Persistent Calling• Get form letter from

attorney• Small Claims Court?

Expenses – Control before they Happen• Re-evaluate all expenses routinely and periodically

– Scrutinize monthly “built-in” expenses like janitorial, wireless phones, etc.

– Watch out for “hidden fees”– Periodically shop vendors

• Delay purchasing• Utilize discounts• Track rewards and utilize• Buy in Bulk when appropriate• Work with vendor and spread out payments• Reward employees for cost-cutting ideas

Making Payments - Payables

• Flip side of Receivables:– Delay payment until invoice is

due, specifically until overdue charges begin

– Overdue at 1-1/2% is expensive– Negotiate to delay/drop overdue

charges

• Scrutinize invoice and don’t pay unnecessary

• Avoid advance payments, deposits, retainers, progress payments

Credit Lines and Buyer Financing

• Part of Many (Most?) Channel Programs– Offered by most Distributors and Major Manufacturers– Also Commercial Financing Operations (e.g., GE Capital)– Go by various names – Working Capital Credit Lines, PO Credit,

Inventory Financing, Partner Credit Financing, Etc. – Letter of Credit – variation offered by banks

• Characteristics– Varying credit amounts available– Varying terms (free period, interest, repayment amount, etc.)– Terms often change in parallel with economy– Frequently tied into PO processing– Frequently must pledge inventory / receivables to secure credit– Larger deals may require end-user credit and/or direct payment

End-User Leasing

• Offered by Many Manufacturers

• Good for large “purchases” by credit worthy end-customers

• Varying Terms -- Negotiate, Negotiate

• Accounting Rules may be changing

Inventory

• Inventory might as well be cash sitting on shelves• Minimize the inventory

(let vendors carry inventory)• Monitor the inventory “turns”• Get rid of obsolete inventory

Financing Using Company Assets

• Equipment/Vehicle Financing– Leasing– Borrowing against (secured)– Better rates than unsecured loans– Easier to finance new equipment/vehicles

• Real Estate – Renting/leasing– Financing limited to extent you have equity– Typically the best financing rates– First Mortgage– Second Mortgages/ Line of Credit

• Easier to obtain “when you don’t need it”

Employment Cash Flow Techniques • Outsourcing

– Delays payment 30-to-60 days vs. hiring employees– Need to exercise care – employee vs. independent contractor

rules

• Salaries/Bonuses– Pay less in salary / more in bonus (bonuses defer payment until

year-end)– Commissions / Pay for Performance– Equity

• Benefits– Insurance Companies won’t allow late payments

Taxes and Dealing with the Gov’t

• Tax Payments– Employment Taxes

(Federal and State Withholding, FICA, Unemployment, etc.) Don’t Mess With!

– Sales and Use Taxes Don’t Mess With!

– Estimated Federal Income Taxes – Tax Accountant

• Property Taxes, Permit Fees, etc. – Pay when Due

Unsecured Loans, Credit Cards, Personal Loans, etc.• Credit Cards

– Employee Credit Cards and then Reimburse?– Company Credit Cards – Pay on time if possible

• Loans– Personal Credit Lines / Personal Pledges on Company Credit

Lines– Home Equity, Second Mortgages, and other Asset Backed loans

• Shop Around

Cash Flow Planning

• Typically done for 90 days at a time

• Engage Accountant or Do it Yourself– P&L Management essential

• Cash Inflows minus Cash Outflows– Timing Difference between

Outflow for Purchases and Inflow for Collections

Cash Inflows: Month 1 Month 2 Month 3

Customer Payments

$20,000 $35,000 $18,000

Other Income $1,500 $800 $1,200

Total Cash Inflow: $21,500 $35,800 $19,200

Cash Outflows

Hardware Purchases

$12,100 $6,400 $15,800

Salaries $12,000 $12,600 $13,000

Other Expenses $6,500 $6,900 $6,750

Total Cash Outflow

$30,600 $25,900 $35,550

Net Cash Flow ($9,100) $9,900 ($16,350)

See CompTIA Cash Flow Management Guide for more detail

Strategic Process – Monitor Trends

• Financial Dashboard• Benchmarks• Business model calculator• Analyzes data from Your Accounting System

– QuickBooks (automated)– MYOB (Australia, New Zealand - automated)– Other Accounting Systems (file import)

• Goal tracking• Solution for showing financial progress to your team

What is CorelyticsTM?

Special Edition for CompTIA Members

What Benchmarks Exist?

• Corelytics© by CoreConnex, Inc. (www.corelytics.com)

• CompTIA sponsorship of Corelytics Financial Dashboard• S-L Index™ Included in Corelytics

• S-L Index™ by Service Leadership, Inc. (www.service-leadership.com)

• S-L Index™ Comprehensive Diagnostic Report©• S-L Index™ Quarterly Comprehensive Report©

Monitoring Trends

Problems when:• Revenue up and cash

down• Expenses growing

faster than revenue• Cash fluctuations are

extreme• Revenue fluctuations

are extreme

Strategic actions:• Set goals with

management team• Ask team to help close

the gap between actual and goal line

• Keep the team informed using graphs

• Compare to industry benchmarks

Wrap Up

• P&L Management – for tactical process• Balance Sheet – for strategic process• Accelerate the Sales and Collection Process• Manage Expenses• Delay the Expense and Payment Process• Credit Lines and Buyer Financing• Company Financing and Employee Payments• Cash Flow Planning

• Questions?Dashboard at:

CompTIA.Corelytics.com

References and Additional Materials• CompTIA website (www.comptia.org) – Member

Resource Center – under Business Management Finance

• Corelytics – www.coreconnex.com for overview• Sign-up – CompTIA.Corelytics.com • Service Leadership – www.service-leadership.com

CompTIA Benefit:

Free Financial ReportSee your trends, financial strength and future forecast

Free Financial ConsultationCompTIA members get consultation with Financial Expert

How?• Email: [email protected]• Subject: Financial Strength• Text: Your contact information & your

current accounting system

Questions?

Thanks!