Skip navigation

Cash is paramount for running a business. Here are five easy rules for creating a positive cash flow plan for your company.


by David Evans


With Opening Day of Major League Baseball over, I breathe a deep sigh of relief as a ticket broker. It means my company, EasySeat, has started shipping all of the baseball tickets that it has been purchasing for the last 7 months.


That means cash flow will soon turn positive again.


In EasySeat’s business model, cash is king, and ensuring that we have enough cash to fund inventory and operations is critical to our success. Successfully managing, and understanding, cash flow is not a skill reserved for MBAs. Every business owner should understand their cash flow.

Here are five easy rules for creating a simple cash flow plan:


1. Project monthly sales (and curb your optimism). When projecting sales for cash flow purposes, don't be the optimist. Use worst-case-scenario estimated sales figures or historical monthly averages. Any sales figure used for cash flow planning should be something that is readily achievable. Remember, this process is used to make sure that the business has sufficient capital to operate, not an exercise in projecting success.


2. Remember receivables. Not every sale is created equal when it comes to cash. Cash and credit card sales are available for ongoing operations immediately, but sales with terms can take 30, 60, or even 180 days or more to turn into usable funds. Factor this timing into any projections, and most importantly, remember the potential impact on cash flow before extending terms to new customers.


3. Consolidate predictables. Every business has a core monthly cash burn that includes things like rent, payroll, and telephone service that are consistent and predictable. Consolidate these numbers into one operating expense figure that reflects how much cash must come in the door every month to stay in business.


4. Adjust for growth. It’s critically important to account for the capital required to grow. Many successful businesses fail by not having sufficient cash to fund their growth. New sales often require new expenditures for equipment, employees, and marketing. In most cases, the expenses come before the sale which requires that the cash is available in advance.


5. Plan for the unforeseen. To quote Donald Rumsfeld, these are “known unknowns.” For example, if the Yankees make the World Series, it’s a huge opportunity for increased sales at EasySeat. At the same time, it will mean extra inventory to purchase, and therefore, extra cash to buy those tickets. Scenarios such as this need to be factored into any cash flow forecast to ensure that, when opportunity arises, the business is in a position to capitalize. If there is a place to be optimistic in planning cash flow, it’s here. If the situation never materializes, it simply leaves the company in a much stronger capital position.


These five simple rules can be used to create a basic cash flow plan, but it’s important to understand the ramifications of the numbers. The monthly "predictables" (#3) is the amount of cash required to run a business status quo. To grow, enough cash must be available to fund the new expenses that will drive growth.


Whether the plan is status quo or growth, any cash flow forecast must include a contingency plan or “slush fund” to account for potential new opportunities or challenges. Keep a running total of monthly cash flow, sales minus expenses, and the lowest net total is the amount of extra cash required to run the business or achieve a sales growth goal. If this amount is negative, it must be available to the company in the form or credit or existing capital. Once planning cash flow has been mastered, cash will still be king, but it’ll be more of a figurehead.

Article provided by © Inc.

HolidayInventory_Body.jpgby Jen Hickey.

Managing cash flow and inventory is part art, part science. For small businesses that derive a significant chunk of their profits during the holiday season, not keeping enough inventory can result in loss of sales to competitors, while keeping too much leads to fire sales of merchandise at the end of the season. Smaller retailers and wholesalers need to walk that tightrope between meeting increased holiday demand and keeping inventory costs low to maximize profits that will help sustain them through the next high season.


According to ShopperTrak, modest gains in 2012 holiday sales and foot traffic are expected, but that doesn’t mean entrepreneurs can afford to be complacent. “Small retail businesses need to start preparing for the holiday season at the beginning of the year,” notes Scott Berger, tax and entrepreneurial services principal at South Florida-based Kaufman Rossin & Co. “Start by projecting cash flow to be sure you have the means when it’s time to place orders.”


HolidayInventory_PQ.jpgFor smaller retailers and wholesalers, a line of credit can help manage the lag in cash flow from accounts receivables or payables. But, as Berger points out, “it’s a lot easier to get credit when you don’t need it.”  Vendors, just like banks, are reluctant to extend credit if your business is not profitable. But having a line of credit when you don’t necessarily need it also gives your business more purchasing power.


“How far in advance you can begin stocking for those seasonal sales will largely depend on cash flow availability and terms worked out with vendors,” explains Berger. Ordering early and in bulk often garners discounts and more favorable terms, like being to wait until after the season to pay for inventory or the ability to return a certain percentage of unsold items. However, buying early does run the risk of tying up cash in unprofitable or obsolete inventory.


But how to know when and what to buy is a particular challenge for small retailers, who don’t want to hold too much inventory since carrying costs can quickly eat into their margins. “History is a good indicator of what you can expect for sales,” notes Berger. “But these have been challenging economic times, so it’s important to keep your finger on the pulse of what’s happening.” Berger recommends attending trade shows, talking with “friendly” competitors, and meeting with your vendors to gauge demand and trends.


While keeping on top of industry and market trends will help you figure out what’s selling this season, past sales results can also be a good indicator how much inventory you should keep. “Small retailers often have repeat customers, so they know what the demands are,” Berger points out. “If you properly forecast sales, you should be able to properly forecast purchasing.” The best way to minimize inventory costs is to keep inventory levels at their lowest during slow sales times. Berger advises any inventory-driven business to have computerized, perpetual inventory systems tied to their point of sales system or register. “The better the internal controls, the better the profitability when it comes to inventory,” notes Berger.


When to start stocking up for the season also depends on the terms you’ve negotiated with your vendors. “You must understand the turnaround time from your suppliers to know how fast orders can be filled and refilled,” notes Berger. Running out of “hot” items during the peak season translates to empty shelves and missed sales opportunities. But keeping too much inventory can tie up cash. “In retail, there’s an adage that your first markdown is your best markdown,” explains Berger. “Retailers discount inventory early and often to reduce carrying costs and make room for new, hopefully more profitable, inventory.”


An inventory-driven business should identify their top-selling items to make sure they never reach ‘out of stock’ condition, cautions Berger. In addition, he recommends writing down or disposing of items that have not sold in the last few quarters. It’s also critical for small retailers to monitor their financials throughout the year, particularly when business is brisk. As Berger points out, “cash flow and inventory go hand in hand.” So how you manage one affects the other. “Owners of small retail and wholesale businesses know their merchandise and know how to sell,” says Berger, “but they need to focus as much on managing back office as the front.”



Berger’s Holiday Budgeting Tips:


Keeping on top of cash flow: Begin budgeting cash flow for next holiday shopping season at the beginning of the calendar year and track cash balances closely during the run-up, particularly during the busy months when opportunities for error or theft are higher. Last year’s holiday profits should carry you through the slower months. Bill and collect as quickly as possible if you don’t operate a cash business. Secure a line of credit from bank or vendors.


Inventory management: Review inventory on a regular basis. Move out items that aren’t selling to make room for the upcoming holiday season’s hot-selling items. Manage purchasing so your business can meet higher demand for popular items during holidays. Have staff and systems in place for more precise inventory management.


Vendor relationships: Work out the best terms you can with vendors. Renegotiate deals, if necessary, to meet your cash flow and inventory needs. Small wholesalers need to push for timely collection on any outstanding receivables to have cash available to pay their vendors. And small retailers need to look for discounts where they can get them (e.g. purchasing early or in bulk) and ask for the most favorable purchasing and payment terms to keep cash liquid.

by Eric V. Holtzclaw

Cash flow is the most important financial item for a small business owner to pay attention to. Here's how to speed it up.


My company, User Insight, works with a roster of customers including many Fortune 500 and Global 2000 companies. While working with customers this large gives us some assurances and benefits, fast-moving cash flow is not one of them.


Cash flow--how cash flows through your organization from sale to invoice to receipt--is the lifeblood of a small company. Speeding up your cash flow allows you to do more and gives your company more stability.


Also, if you accept that your customers take longer to pay you than you pay vendors, you are, in essence, lending your customers money to operate their businesses. If a customer won't change payment terms to your company's benefit, you'll want to reconsider any favorable terms you offer him.


Here are seven ways to recoup your company's cash faster:


1. Offer a discount for early payment.

To incentivize your customers to pay you earlier, offer them a price discount if they do, and be sure to highlight it in the contract and invoice. Several of our customers take advantage of an early-payment discount we offer, and sometimes even overnight a check to make sure they don't miss our discount window.


2. Use online payment systems.

Several of our customers use online systems to submit invoices.  If we participate in those systems, we find many of them will pay off their invoices within 15 to 18 days of receiving them. The best part is that the money is electronically deposited directly into our account. If your customers are not using an online system, consider setting one up for your company. I work with a service called, which allows us to pay anyone or be paid by anyone electronically.


3. Require an upfront fee.

If you know that servicing a customer requires you to expend big dollars on its behalf, collect as much of that money as possible (if not all of it) right away. Submit an initial invoice, and insist it is paid on receipt, or outside of normal payment terms. Most companies understand the situation and are willing to accommodate.


When we work for clients, my company pays for travel costs and other fees that can sometimes be as much as or more than the payment for our work. To stay solvent, we must collect these out of pocket expenses as soon as possible.


4. Delay the work.

This is a hard one to do.  But if you find yourself in the middle of a project and your customer delays payment, stop the process, and insist on having payment in-hand before you or your team finishes up the work. Often, this is the most valuable leverage a small business has in its arsenal.

I often encounter this situation when we are not hired directly by the end customer. The primary client may pay on time, but the company that contracts us holds off payment to improve its cash position. New regulations, especially for companies that perform work for the government, may help with this situation.


5. Take credit cards.

This will cost you an origination fee, but the percentage might be worth it to help get you your money sooner--whether payment for your services, or coverage of upfront costs. Many accounting packages already have a built-in ability to take credit cards, too.


6. Invoice for lower sums, but more often.

When we invoice customers for large amounts of money, we find the invoices get stuck somewhere in the payment process.  The dollar amount seems to have a lot to do with it.  If we submit an invoice to a customer for more than $30,000, it can take 15 to 30 days longer to receive payment than a smaller amount of money.  An invoice of less than $30,000 is more often than not paid very close to on-time.  If you review the size of your customer base and dollar amounts you work with, you may also discover a breaking point between invoices that are paid quickly and those that languish on your customers' desks.


7. Talk with your customers about accounts payable.

This might seem obvious but it's often overlooked: Have a conversation with your customers about their accounts payable processes at the start of your relationship. You will find that knowing your customers' processes will help you when you bid for new business, and when you structure invoicing milestones to shorten the payment cycle.

Article provided by © Inc.

Quide3.jpgManaging Your Cash Flow (click to download) is part three in a series of informational resource guides designed to help small businesses understand more about managing cash flow.  Part three provides strategies and tools to help you understand the importance of monitoring, tracking, planning and preparing financial statements.


Click to download part three of the informational resource guides now and remember to view our upcoming e-learning course.


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

Filter Article

By tag: