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"Quide2.jpgThe Ins and Outs of Cash Flow" is part two of a series of informational resource guides designed to help small businesses understand more about managing cash flow.


Part two (click here to download) provides tools and strategies to help you understand and control your company’s inflows and outflows of cash so you have a better understanding of your financial health.


Click here to read all three of the informational resource guides now.


How to Get Paid Faster

Posted by Inc. Oct 26, 2012

by Jeff Haden


Here's a simple way to figure out how quickly you're collecting--and how to do it faster.


Dear Jeff,

I am applying for a business loan and the lender is scrutinizing every aspect of my business. He just asked for my Accounts Receivable Turnover. Is he digging too deep?

--Name withheld at request

Accounts Receivable Turnover (ART) is a measure of the frequency of payment on accounts receivable, the money owed to you by your customers you are waiting to "receive."


The lender is simply taking a close look at one of the factors that affects cash flow. In effect a credit sale is like a loan, so the lower the ratio the more slowly your customers are paying off the loans you make to them; the higher the ratio, the more quickly you're being paid.


How fast are you getting paid?

Here's the formula: ART = net credit sales / average accounts receivable

For example, say last year your net sales were $200,000. You don't take payment by credit card; you send invoices. The average, at any given time, of your outstanding receivables was $50,000.


200,000 / 50,000 = 4, so your Accounts Receivable Turnover is 4.


If your customers purchase goods or services through a purchase order, or you send invoices, the money you are owed is considered a receivable. If you're a consultant and you perform a service and bill the client later, the bill is a receivable--it is money you are owed but have not been paid.

But a credit card sale is not "credit" for the purposes of this metric; while the customer is using credit to make the purchase, you get paid right away (roughly speaking.) The credit card company extends the credit, meaning that's a receivable for it, not you. So don't include credit card sales in your net sales, at least for the purpose of this metric.


So, two main factors affect your ART: Your payment terms and whether your customers meet those terms. You may ask for payment on receipt, or within 15 days, or 30 days--whatever makes sense for your business, offset by customer expectations. If your terms are too tight some customers may find another vendor willing to offer more generous terms.


Many companies set payment terms of net-30, which means 30 days from the invoice date. Others set terms of 15 days, seven days, or even "on receipt."


Of course, if you specify net-seven and expect payment within seven days of receipt of invoice, the entire process typically takes longer: It may take you several days to generate the invoice, then another day or two to actually process the payment and make a deposit... all of which increases your ART.


You can do several things to increase your ART:

  • Shorten your credit terms, say from net-30 to net-15
  • Require initial deposits to reduce the total amount of credit extended
  • Improve your billing efficiency so invoices are generated and sent as quickly as possible
  • Create incentives for rapid payment of invoices
  • Work to shift more customers, especially new customers, to pay by credit card or bank transfer. (Sometimes this is as easy as saying, "How would you like to pay: by credit card or wire transfer?")


Keep in mind ART does not exist in a vacuum. Say you take credit card payments and fees are 3% of sales; if you can receive check payments within seven days from the majority of your customers, building in an intentional receivable delay may more than offset the fees you would be charged by the credit card company.


So if your ART is relatively high because you've made smart business decisions, walk your lender through that analysis. If it's low, work to get paid more quickly.


Even if you don't get the loan, raising your ART will help your business.


Article provided by © Inc.

Quide1.1.jpgCash flow is vital to the success of every small business. Businesses doing cash flow planning once a year have only a 36% survival rate over five years. This contrasts with those planning monthly, which have an 80% survival rate.* An Introduction to Cash Flow Management is part one of a series of informational resource guides designed to help small businesses understand more about managing cash flow.


Part one (click to download) provides an overview of cash flow including definitions, common misconceptions and tips on taking the first steps to improving your current cash flow management practices.


Click here to read all three of the informational resource guides now.

*Source: Dun & Bradstreet's Business Failures and Start-ups Analysis 

Getting into position for capital infusion


Just as you wouldn’t head to the car dealership’s finance desk before being ready to make a deal, it’s just as critical to put some work into preparing for presentations to potential investors in your business. Whether you’re seeking a Small Business Administration loan from a bank or big bucks from a venture capitalist, it’s critical to put your best financial foot forward to show that your business is a good risk, says former banking executive Denise Winston, founder of Bakersfield, California Money Start Here, a financial education company.


She suggests spending some time on the following four key areas before meeting with prospective lenders or equity investors.

  • Beef up your business plan. When your business is smaller, your business plan can be a simple document that outlines the broad strokes of your business, plus some basic financial projections. However, as you grow, both in terms of your company’s size and its capital needs, it’s critical to show lenders and investors that the company has leadership depth and vision. “We want to see that the company is not just reacting to the market, but that they’re thinking strategically about their role and how to recognize opportunities and make the most of them,” says Jonathan Dowst, senior vice-president, Credit Products Executive, Bank of America. 

In the plan, highlight any strengths, such as key personnel, exceptional location, or lack of competition in the market, that might work to your advantage. Prospective lenders and investors will look for strong positioning and indications that the company understands how to disrupt the marketplace in ways that will allow it to grow and capture greater market share.

  • Clean up credit. The first thing a prospective lender or investor is going to do is pull your credit—both business credit and those of company owners, says Winston. It’s important to review each of these profiles to ensure they are accurate and reflect the business and individuals in the best possible light, she says. Do this several months before meeting with lenders or investors to allow time to correct any errors, outdated information, or inaccuracies. A spotty or incomplete credit history can raise red flags even for established, growing middle-market businesses.
  • Make the money a priority. When your company was smaller, handling the finances in between other leadership responsibilities was fine. For bigger businesses seeking outside funding, lenders and investors will want to see a chief financial officer or, at least, an employee or team dedicated to ensuring that the company’s payables, receivables, and other financial functions are being addressed competently on a daily basis. Proper invoicing and collections are a critical part of this process, says Winston, as a company with significant collection issues may trigger lender or investor concerns about cash flow.

“A lot of business owners, are not great at collecting because they’re the business owner and they have these relationships. So, they need to put somebody on the job and make a concerted effort to get their accounts receivable up to date,” Winston says. If it’s possible to collect a portion of your receivables upfront or offer discounts for early payment, that can help ease the receivables crunch, too. 

  • Forecast the future. Any investor is going to want to see an ability to repay. Lenders will want to see projections that illustrate how the business will bear the financial load of the loan payment each month. An equity investor, such as a venture capital firm, angel fund, or super-angel investor, is going to want to see how the business plans to generate a significant return—usually three to five times the initial investment—within five to 10 years for the investor. Your financial statements and business plan should fully illustrate these projections, presenting the business as a good risk.


By spending some time on these key areas, growing businesses can become significantly more attractive to lenders and investors. Fewer businesses would have trouble attracting outside capital if they put more time into showcasing their strengths, shoring up weaknesses, and putting their best financial foot forward when speaking to lenders and investors.

Article provided by ©Inc.

ProfitMargin_Body.jpgby Jen Hickey.


For many small businesses owners wrapped up in the day-to-day of running a business, figuring out their profit and loss (P&L) often becomes a task foisted onto their accountant once or twice a year. But to maintain a healthy business, you need to track revenues and expenses at least quarterly to see that you have enough left over after taxes to pay down debt, reinvest in operations, and build up cash reserves. While margins vary by industry and type of business, without enough free cash flow, your business will find it difficult to survive, never mind grow, if faced with unforeseen costs or loss of revenue.

While a P&L statement can help you understand the day-to-day costs of running your business, a break-even analysis is a better indicator of available cash flow as it breaks out fixed, variable, and debt service costs. “Once you reach that threshold where revenues cover all your expenses, the amount of money you make for every incremental dollar is much higher because your variable expenses aren’t growing as fast as gains on the revenue side,” explains John Matthews, president and CEO of Gray Cat Enterprises, Inc., a strategic planning and marketing firm based in Wake Forest, North Carolina. He recommends calculating multiple “what if” scenarios to account for a significant drop in revenues or rise in expenses as well as re-forecasting quarterly to address shortfalls and control costs. “If you don’t understand the profitability drivers of your business, you’re just shooting in the dark,” cautions Matthews.

Trim the fat

Typically, businesses that produce or distribute products have lower profit margins than those providing services due to the higher overhead, inventory, and investment costs. However, there are ways to reduce fixed as well as variable expenses by “scrubbing” each line item in your P&L statement. Matthews sees opportunities for savings in both fixed and variable costs, such as renegotiating a longer lease for a lower monthly rate, changing your phone plan to eliminate those unused minutes, or encouraging energy savings among your employees. Another tip: many retailers he has worked with have been able to cut their waste management costs by maximizing the amount of space in their refuse containers for less frequent pickups.  “Saving a few percentage points here and there really adds up if you’re a retailer,” Matthews points out. 


ProfitMargin_PQ.jpgMatthews also recommends looking at “key performance indicators” to find those hidden costs within each line item. “By breaking down some of those higher P&L items into components, you can see more clearly what’s driving up your expenses,” he notes. “Labor can be broken down by number of hours and hourly pay to see if savings can be found by increasing staff levels to reduce overtime.” He also cautions against adding any unnecessary expenses. “One of the reasons businesses fail is that they use it to write off personal expenses like vacations or cars,” notes Matthews. “My business remains profitable because I keep the fluff out of my P&L statements.”


Know where your profits need to go

“To sustain itself and grow, a business must have enough positive cash flow to reinvest in the business and reduce outstanding debt,” explains Xavier Epps, founder and financial advisor of Woodbridge, Virginia-based XNE Financial Advising. Epps works with small businesses to help them streamline operations and be more efficient so they can be more profitable at the end of the day. After looking at profitability averages across various industries, Epps counsels his small business clients to aim for a net after-tax profit margin of around 17 percent, with 7 percent set aside for cash reserves, 5 percent for investing in assets/expansion, and 5 percent for paying down debt. While profit margins set for service businesses often exceed the average, goals for businesses that sell products hover around 11 percent, as the cost to produce and distribute these goods tends to eat into the margins. “Once we get to that goal consistently for a few quarters, we will look to achieve higher growth,” notes Epps.


Epps cautions against aggressive and costly marketing and advertising strategies and offering large discounts, which puts downward pressure on profit margins. “Sometimes these line items can account for 15 to 20 percent of expenses while profits remain flat,” says Epps. “Once those expense items are cut back, profit margins rise, as that money can be put toward reducing debt and reinvestment.” While Epps believes some marketing and advertising as well as discounting can be effective if there’s a clear return, putting that after-tax profit back into your business can be the most effective growth strategy. “By focusing on trying to improve or expand your product or service offerings, your existing customers will recognize that and recommend you to others.”


Smaller market requires larger margins

While many businesses keep prices low with the hopes of making a profit through high volume, Andy and Jennifer LaPointe take a different approach to their food consulting business in Elk Rapid, Michigan and gourmet food products business, Traverse Bay Farms, in nearby Bellaire. Their strategy is to target a smaller segment of the market more interested in quality over price.


“We go for the medium to high-end price range,” notes Andy LaPointe. “But to do that, we have to offer genuine value to our customers.” For the consulting business, this means offering clients more specialized services to help ensure repeat business. And by showing customers where the ingredients for their products come from and how they are produced through media content and celebrity testimonials, they are able to create a story for their brand. “People are more willing to pay if they understand the vision and value in your products,” explains Andy LaPointe.


Because they’re targeting a much smaller segment of the market with their products and services, there is less competition for that mid to high price point. However, that means they need their businesses to collectively generate profit margins of between 50 to 200 percent to not only survive but grow. The consulting business, which has less overhead and reinvestment needs, generates higher margins (100 to 200 percent), while their products business hovers on the lower end, as it has much greater overhead and reinvestment needs. In their forecasting, they add 30 percent to debt service and real costs, which raises the end price needed to maintain these profitability levels. “We know we have the cash reserves to absorb the costs of unexpected weather events that can disrupt production, without large price fluctuations to the end consumer,” notes Andy LaPointe. “The higher the margins, the more value I can add over the long term because I have the cushion to absorb missteps and/or changes in the market.”


Less overhead, higher margins

Maciej Fita launched his virtual search engine-marketing firm, Brand Dignity, just outside of Boston in 2009 with just enough money for a business license yet he’s been profitable since day one. “We don’t have office-related expense and most of our fixed costs are for software needed to keep us running,” Fita points out. “We do almost everything we offer to our clients ourselves.” Fita has software that helps him analyze cash flow, which he reviews at least monthly. “We’ve tried to be super-efficient with the way we spend cash.”


Through his industry contacts and networking, Fita has positioned his company as an expert in the field, so he has not had to spend money on outside sales. He’s also focused on partnering with other creative agencies that don’t offer SEO marketing solutions. Bootstrapping and minimal overhead have enabled Fita’s company to average profit margins of 60 to 65 percent.  “Our industry is still kind of the wild west when it comes to pricing,” says Fita. “But we’ve stayed in the middle range, which allows us to offer an affordable solution while we continue to grow.”


“Running a business is not unlike managing a household budget but just on a much larger scale,” explains Matthews. “You still have to bring in more than you spend.” If your business is burdened with too much debt, it makes it that much harder to be profitable. “Just like having a mortgage on a house, you need to make more money to pay the mortgage,” notes Matthews. “But if you own the house outright, you could make less and still have money left over to invest.”

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