Cash Flow | Alliance Advisory Group Blog

July 12, 2010

Suppliers are increasing scrutiny and cutting off risky customers

We’ve written previously about the state of the small business loan market but only about 20 percent of the short-term credit for small businesses comes from this source. Suppliers make up most of the rest, according to the Credit ¬Research Foundation, a trade group in Columbia, Md.

Now with banks ¬choking off credit, many small companies are pressing vendors for more time to pay their bills, in effect asking for a loan to tide them over until they get paid by their clients.

In response to this increased risk trade creditors are taking a closer look at customers that ask for credit. They are using sophisticated risk analysis tools to ferret out and cut off customers who are least likely to pay their bills. It is estimated that over the past 18 months trade creditors have doubled their use of scoring tools such as credit reports from Dun & Bradstreet and Experian. PredictiveMetrics, a firm that advises trade creditors on risk, has seen client inquiries triple over the past three years.

It used to be that business owners who were late on small debts could work out a deal with suppliers, but the analytical tools leave less wiggle room. A plumber working on new commercial construction that may never be completed might now be categorized as a higher risk than a repair plumber who does small jobs in existing homes and is more likely to be paid by his clients.

Trade credit, like bank loans, are only one source of many for meeting the credit needs of a business. Like bank loans and other credit sources trade credit needs to be properly managed and maintained in order for it to fill the right piece of a company’s funding needs. Make sure you have developed a good funding plan for your business, analyzing the pro’s and con’s for each and ensuring you have backup sources of funding in other area’s in the event some level of your business funding is reduced or cut off.

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July 2, 2010

The Virtual CFO: Using payments/banking technology to increase efficiency and value

Filed under: Strategic Advisory — Tags: cash flow, cash flow management, cash planning, financial management, liquidity management, planning — admin @ 7:21 pm

Business owners need more help than ever to manage cash flow and budget expenses – and 68 percent say they are looking to their accounting and financial partners to provide this help, according to an informal SunTrust survey of business owners.

The broad adoption of online banking and electronic payments brings an increased flow of electronic payment information. Virtual CFO’s (VCFO) can leverage this data to help clients map a cash-flow strategy, assemble detailed budgets and financial statements, and monitor progress on-site or remotely.

Additionally, through deep knowledge of a client’s business and careful research into his or her payments-related practices, a VCFO can provide recommendations to help address priority business issues such as improved cash flow and reduced expenses.

With payment options comes increased customer convenience, which is why more and more business owners have adapted their systems to accept more payment types. Twenty-six percent of business owners added the customer choice of electronic or card payments in the last 12 months, according to an informal SunTrust survey of business owners.

Many small businesses still run a cash-only operation, but consumers and businesses alike continue to move toward electronic payments. Debit and credit card acceptance is becoming a consumer expectation, but card acceptance also is becoming increasingly important in business-to-business commerce. Many companies and government institutions rely on purchasing or corporate cards to reduce the costs of working with vendors. In order to accept their payments, businesses need to be able to accept the cards.

In addition to offering customers convenience, electronic payment capabilities can have an impact on collections by allowing a business to accept a check or card payment over the phone from late-paying customers rather than waiting for a customer to drop a check in the mail.

Active client use of online banking and access to financial information is an important step in a VCFO strategy. This tiered access allows the VCFO to serve clients more efficiently, more often, and from almost anywhere in the world.

Another important cash flow tactic is helping clients set up procedures to analyze and control expenditures. For example, providing designated employees with access to a company credit card can improve expense tracking and limit or restrict spending, in turn giving the business more control over expenditures and cash forecasting.

On the reporting front, a VCFO can use electronic information to create systems that automatically compile a monthly flash financial report from electronic financial data to help evaluate clients’ business performance. This data can be used as part of regular meetings or teleconferences to review performance against targets for budgeting expenses, generating sales, or maximizing cash flow.

As technology advances, better access to better information can help a VCFO increase his or her value to clients. Using electronic financial and payments data can help CPAs automate key reporting functions and spend less time compiling reports and more time working with clients to drive business success, helping elevate the VCFO’s role from bookkeeper or advisor.

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May 24, 2010

Successfully Navigating the Current Bank Lending Environment

Filed under: Strategic Advisory — Tags: business, business planning, cash flow, finance, financial management, liquidity management, planning — admin @ 8:21 pm

* Has your lender tightened the terms on your existing loans?

* Have you found getting new loans a challenge?

* Has your lender been merged or bought and your relationship lost in the confusion?

* Not sure what is really happening in the banking industry?

Credit is the life blood of our economy and particularly our business-to-business relationships. This flow has been severely disrupted and threatens to take many viable businesses down with it. If you think the impact is just confined to Wall Street or the money center financial institutions, think again! We are now seeing the cascading ripple effects flowing into all corners of our national economy. Cases in point:

* Our client (whose bank recently changed hands) contacted the bank to inquire about their line of credit and was told the bank had no record of any such LOC.

* Another client received a form letter from their bank telling them their line of credit had been frozen. This left the client without their expected operating funds on which to run their business.

Although we are starting to see some freeing up of the credit markets, we still have a long way to go before we get back to “normal.” Many of our clients have had to devote much time and attention to establishing new bank relationships or reestablishing existing ones.

Here are some tips for getting and keeping a solid bank relationship:

1. Have a business plan that provides the company’s background, its history, and most importantly, where it’s going in the future.

2. Provide budget and financial projections. An entrepreneur who’s borrowing money should detail what he or she is planning to do with those funds and how they’re going to help the business grow or thrive.

3. Check your personal credit score regularly. Banks often do. Most lenders are going to look at your credit score because it tells a lot about the individual that you won’t see otherwise in a business set of financials. If an individual has a bad credit score, it doesn’t matter how good the company financials are.

4. Maintain up-to-date financial records prepared by a business accountant even if you use accounting software. A lot of people use canned software systems, but [records] should be prepared by someone who’s financially astute, who can prepare a balance sheet, income statement, tax returns, and updated personal financial statements for the chief executives.

5. Plan for the possibility that you may have to personally guarantee the loan.

6. Be prepared to provide personal collateral for the loan if asked.

7. Seek out information from the Small Business Administration to see if you qualify for a loan guarantee.

8. Start and maintain a relationship with the bank. If a bank is going to make a loan, they want you to bring your entire banking relationship to them—deposits, business accounts, even your personal account.

9. Refer other businesses. Banks are always interested in receiving referrals. It’s not a bad thing to refer other businesses to your bank.

10. Don’t surprise your banker. Banks don’t like surprises. If there are things happening at the company—good or bad—be sure to communicate with the bank. Let them know how you’re doing—the things that are positive and negative. Make a concerted effort to meet with the bank regularly.

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Top 10 Tools for Maximizing Cash Flow

Filed under: Strategic Advisory — Tags: cash flow, cash flow management, cash planning, finance, financial management, liquidity management — admin @ 8:05 pm

1. Shore Up Capital (both equity and debt) as you go. This means leave equity in the company to grow so that borrowings may grow as well without increasing the debt-to-equity ratio.

2. Track Cash Daily so you can manage cash outflow (your company’s expenses), cash input (payments received) and borrowings appropriately.

3. Re-Forecast Cash Weekly to get good at projecting cash surpluses and shortages well in advance.

4. Stay Close to Lenders and prospective Investors long before you need them!

5. Remember that Growth Gobbles Cash, so determine the “right growth rate” for your company at its different stages of life.

6. Become a C-H-I-P-S searcher for life! That stands for “Cash Hides In Peculiar Spots.” Turn over every stone as you walk the four corners of your business daily.

7. Break The Check-Signer’s Arm! And then sign the checks yourself for a while; this will help you REALLY understand where your people are spending YOUR money.

8. Have An “all Hands” Weekly Meeting with everyone in the business who has an impact on cash, incoming and outgoing.

9. Remember — Owning 40 Percent Of A Success is far better than owing 100 percent of a failure. Too many entrepreneurs have hung onto “control” right into Chapters 11 and 7!

10. Become A Cash Student, striving to understand the things that have driven your company into paroxysms in the past.

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April 17, 2010

Managing Your Cash Flow

Filed under: Strategic Advisory — Tags: cash flow, cash planning, financial management, liquidity management — admin @ 12:42 pm

A healthy cash flow is an essential part of any successful business—made even more critical in this current economic environment. Some business people claim that a healthy cash flow is even more important than your business’s ability to deliver its goods or services! That may be placing a bit too much importance on your cash flow, but consider this—if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. But, if you fail to have enough cash to pay your suppliers, creditors, or employees, you’re out of business! No doubt about it, proper management of your cash flow is vital to making your business successful.

* Understanding cash flow is the first step in effectively managing your cash flow. There’s more to it than it just being a fancy term for the movement of money into, and out of, your business checking account.

* Your profit is not the same as your cash flow. It’s possible to show a healthy profit at the end of the year and yet face a significant money squeeze at various points during the year.

* Analyzing your cash flow will help you spot some of the problem areas in the cash flow cycle of your business. As in any good analysis, you need to look individually at each of the important components that make up the cash flow cycle to determine if it’s a problem area or not.

* A cash flow budget is a good way of predicting your business’s cash flow for the next month, six months, or even the next year. If you aren’t preparing a cash flow projection, now is the time to start. It may be eye opening.

* Improving your cash flow will, without a doubt, make your business more successful. Accelerating your cash inflows and delaying your cash outflows are key factors for improving and managing your cash flow. The cash flow budget is also a handy tool to use in the improvement and management of your cash flow.

* Filling your cash flow gaps. From time to time, almost every business experiences the need for more cash than it has. If you find yourself in this position, you may have to borrow money to fill the gap.

* Handling any cash surplus is just as important as the management of money into and out of your cash flow cycle. With the proper management of your cash flow, you might find yourself with a little extra cash with which you can pay down debt or earn investment income.

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