Cash Planning | 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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June 7, 2010

Business Sellers Increasingly Play Banker

Filed under: Strategic Advisory — Tags: business management, business planning, cash planning, debt, financial management — admin @ 12:47 pm

During the recession, merger and acquisition activity in the lower-middle market (private companies with up to $100 million in annual sales) was anything but active. Now sharp discounts of private company valuations are again piquing buyer interest.

With the tightness of the traditional bank credit markets (historically a major provider of credit in these situations), which we have written about in this space, buyers are increasingly turning to sellers to fill the funding gap.

We turned to Greg Caruso (a strategic partner of Alliance Advisory Group), President of Harvest Associates, LLC, a noted local expert in the M&A community to provide his insights regarding this situation. Here are his thoughts:

“Seller take-back is an essential component of getting a transaction done today because of the lack of bank financing. In evaluating an offer where substantial seller financing is involved we recommend the following be considered:

1. What will the price be without the financing? Often the price without the seller financing will be very close to the amount being put down by the buyer with financing. Buyers only have the cash they have. The internal rate of return on 3rd party equity is cost prohibitive. If you must sell in this environment what is your real risk from taking a note when the alternative is a guaranteed $0 ?

2. On a more positive note the buyer must be carefully underwritten and transaction structures sometimes must be modified to reduce the risk of taking a buyer note. We recommend that the seller consider – **The buyer’s experience with business in general. Ownership experience is highly preferred. Owning a business is just different than even being the 2nd in command and not an owner. I equate it to the difference between riding a bike and being in the bike seat. Seems the same to the person in the bike seat but it is not. Of course, the buyer’s experience in the exact industry is also helpful. **Additional resources from other sources of cash such as investments, other businesses etc. Remember to consider the likelihood that those sources of cash could become a cash drain and what that would mean. **Collateral such as outside real estate, security in the business assets etc.

3. The seller may have to stay involved with the business for 1-5 years to make sure the buyer can manage the business and pay the note. If the buyer can’t pay the note at least the seller will have a shot at taking the business back over.

None of this is as simple as a bank taking the financing risk. What it means is sellers need to be prepared to share in the risk to gain the upside and sell earlier so they have the energy to stay involved if they want full value. Unfortunately it may be the only way to get full value for your business for quite a while.”

If you are a buyer or seller in this, or any, market it is important that you have a strong advisory team supporting you in the area’s of strategic advisory, legal, accounting, risk management/assessment, etc. The dollars you spend on the front end will save you a tremendous amount of money and heartache in the long run.

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May 24, 2010

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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