Cash is always king, but in tough economic times, cash is life or death for a company. Companies that weather the storm run lean operations, plug cash “leaks” and find creative ways to cut back on expenditures.
“When the economy turns around, businesses with strong cash flow will have the infrastructure in place to capitalize on the upturn,” says Bruce Friedman, CPA, director of assurance services at SS&G Financial Services, Inc.
Gone are the days of extravagant expense account lunches and private jet trips to conferences. Companies are reconnecting with customers in personal ways that don’t cost as much, and business owners are learning that every penny counts.
Smart Business spoke with Friedman about ways you can monitor expenses and raise cash to protect your business.
How can cash flow deteriorate?
Cash flow can ‘dry up’ for a variety of reasons; most commonly, owners tend to be less vigilant with collections when times are good. They are busy producing, managing, planning — moving forward. They often do not take the time to review customers’ accounts and red flag trends that could indicate a client is in trouble or not able to pay, until the balance is excessive and possibly uncollectible.
Another habit that can result in dwindling cash flow is plain-and-simple spending: tickets to sporting events and shows, travel expenses, company cars, etc. All of those perks can add up to a reduction in cash flow over time.
What red flags should business owners watch for in regard to receivables aging?
Business owners focus on receivables during difficult economic times, but they should be managing them carefully all the time. Review receivables aging on a daily basis and, ideally, delegate an in-house team to track collections. Look for trends of slowing payments. Keep an eye on the customer that begins to ‘slip’ so you can catch the account before the balance due builds to an insurmountable number.
Monitoring aging receivables for small accounts is equally important. A client that buys $5,000 from you each month and pays you $3,000 a month can build up a balance of $10,000 past-due in just five months.
What are some strategies for managing accounts with excessive past-due balances?
Again, cash is king. The sooner you can collect from a late-paying client, the better your business is positioned to reinvest that cash in operations, inventory, payroll, etc. Consider reducing a customer’s amount due if the total is paid by a specified date or period of time. You should establish future payment terms at this time as well. While there will be a reduction in the total amount received by giving a discount, you will get your cash quicker and be able to put it to better use. Cash is what you need to keep your business going.
Another option is providing past-due clients with a payment plan so they can work off their balance over a period of time. The downsides to this method are continued questions on collection, the loss of time and money and not having cash to grow your business.
When considering these payment options, determine what is best for your business, as well as your client relationships.
What are other ways a company can raise its cash level?
Comb through your income statement and expenses to find costs that you could eliminate without hindering your ability to conduct business effectively. As you evaluate each line item, decide how the cut would harm sales, customer relationships, employee morale, etc.
There are intangible (morale) and tangible (advertising) aspects of how expense cuts can affect a business, and you must evaluate both. Some primary ways to cut expenses: negotiate deals with vendors; curb spending on entertainment and other ‘luxury’ activities; and don’t lose sight of the small stuff, such as utilities and office supplies. The key when making expense cuts is to ensure these decisions are meaningful and not detrimental to the business.
How can a company cut personnel expenses without laying off employees?
Some companies are finding creative ways to avoid laying off valuable employees while cutting expenses. One method is temporary reduction or elimination of 401(k) matching. Some companies are finding that employees are more concerned about maintaining employment, even if that means sacrificing this benefit for a period of time.
Another strategy is offering or requiring four-day workweeks for some or all employees. A company may ask for volunteers, knowing that the four-day schedule would result in less take-home pay each month. Some employees are happy for the opportunity and additional flexibility. Even if this policy is enacted across the board, laying off people is a bigger morale hit than telling them you are cutting back to four-day workweeks. Of course, the feasibility of this arrangement depends on company operations.
What role can the bank play as a company works to revive its cash flow?
Be open with your banker and share the good and bad news. Explain your cash flow situation and the steps you have taken to improve it. At the same time, communicate with your business advisers. Your advisers work with a variety of companies who very well may be experiencing the same cash flow stresses you are, and can offer insight and case studies to help you through tough decisions.
Bruce Friedman, CPA, is director of assurance services at SS&G Financial Services, Inc. (www.SSandG.com). Reach him at (800) 869-1835 or [email protected].
