Fiscal focus

You may be expert at creating a product, providing a service and marketing your wares.

But if you don’t know how to efficiently collect cash, spend it and invest it wisely, cash flow may be the challenge that brings you to your knees.

Managing cash flow is probably the most challenging aspect of running a company — especially since cash is tightest during growth periods. Even if you rely on your banker, financial planner or accountant to help you manage cash, you need to understand and apply the basic principles yourself on a daily basis.

To compile a mélange of the basic cash-flow management methods, we turned to two area experts: Louanne Kiko, a CPA and manager at the Canton office of Cohen & Co., and David J. Lewis, a tax attorney at Buckingham Doolittle & Burroughs LLP in Akron. Their advice can help you find extra cash when you need it most.

Do it daily. Kiko says the key to improving cash flow is to keep up with those who owe. If you’re not invoicing at least two or three times a week, you’re doing it wrong.

In a tight cash situation, do it daily, because the quicker you invoice, the quicker you get the cash. And in the scheme of things, if you let an overdue account slide past the 90-day point, you’ll likely lose the cash, and the customer as well, because he or she is too embarrassed to do business with you.

Offer a blue light special. One way to keep cash coming in is to offer discounts for early payment on receivables. The kicker, says Kiko, is that sometimes customers will not pay early, but will still try to take the discount.

Lock it in. If you’re seeking quicker access to funds, consider a bank lock-box system, in which return envelopes you enclose with customer invoices are addressed directly to your lock box. Daily, the bank clears the box and applies customer payments directly to your checking account.

This gives you cash quicker, says Kiko, and it’s a foolproof system for internal controls.

Dialing for dollars. When it comes to collection calls, Kiko advises doing it in “ascending order.” Prioritize calls relating to your largest outstanding receivables. Routine collection calls help you determine if a customer received an invoice and the reason the invoice remains unpaid.

Lewis says it’s crucial to enforce payment terms, so clearly convey your credit policies up front. Have salespeople review terms and applicable discounts with customers when orders are placed. Invoices should also state the terms.

Protect your interest. Before charging interest on past due receivables to discourage customers from using you as their bank, research policies of other merchants in your industry. Communicate that policy to customers when orders are placed and before amounts become past due.

While charging interest might alienate some customers, Lewis observes that delinquent accounts limit your cash flow, causing you to access your line of credit, which, in turn, places the burden of higher interest payments on you.

Supply and demand. Negotiating better terms from your own key suppliers can also free up cash. If you’re a good customer and you know it, says Kiko, don’t hesitate to ask, because they know you may be able to get better rates elsewhere. You might also ask long-term suppliers to keep inventory on hand for you and invoice you only when you use it.

Untie the bundles. Excess inventory and dusty equipment is cash tied up in bundles, says Kiko. If inventory isn’t turning quickly enough, consider liquidating it. Compare the value of unused inventory with what you might earn on the money if were it invested in other areas of your company.

Lewis adds that, before selling unused equipment, consider the tax consequences. Cash generated from the disposition may be partly consumed by taxes the liquidation triggers (such as recapture taxes). Consider instead a “like-kind exchange” that may allow you to defer gain recognition and simultaneously acquire newer, more productive equipment.

Color inside the lines. Kiko says a line of credit should generally be used to pay operating payables. Lewis advises against using a credit line for equipment purchases and large capital acquisitions.

Seek better financing terms for those needs, because you may need your line of credit for operating expenses when cash flow is tight. To determine if your line of credit is adequate to sustain operations, review your cash flow analysis with your financial adviser, says Kiko.

Chart your course. Critical in times of tight cash flow, a cash flow analysis enables you to manage your cash flow by providing timely information to your financial adviser. Let your cash flow analysis be your guide in setting your objectives, sticking with your parameters and taking pre-emptive actions.

Flash for cash. A daily flash report is a valuable tool in a tight cash situation. Typically a one-page sheet that reflects current cash balances, receipts, overdue payables and other payments due, this report provides pertinent information that enables you to more effectively manage cash.

Sweep the cash. To reduce interest charges on your line of credit, consider a sweep account with your bank. Kiko explains that whenever there’s excess cash in your checking account, or when you have outstanding checks that won’t clear for a few days, that cash can be applied against your credit line.

If your line of credit is zero, the cash will go into your investment account. When the checks come through for payment, the money will be swept from your credit line back into your checking account. That will bring your line of credit back up, but in the interim, you’ve saved a few days worth of interest on your credit line. The caveat, says Kiko, is to weigh the interest savings with the applicable sweep account fees.

Defer compensation. To prevent shareholders from pulling too much cash out of the company, consider a deferred compensation arrangement to be paid once the company stabilizes. Lewis says this may actually enable your corporation to pay shareholder employees a higher compensation at a later time, while maintaining the tax deduction for reasonably paid compensation.

Do it and die. Most important, never borrow from payroll taxes, says Lewis, pointing to the potential for individual liability on unpaid withholding taxes, despite the corporate structure, and the threat of criminal tax liability when you “borrow” from the government.

The penalties are severe, says Lewis, so don’t do it — shut the business down instead. How to reach: Cohen & Co., (330) 430-1040; Buckingham Doolittle & Burroughs LLP, 330-376-5300