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22 Replies Latest reply: Nov 18, 2008 3:11 PM by SBC Team RSS

Event: Cash Flows and Preserving Liquidity

SBC Team Master
Currently Being Moderated
Are you currently unemployed? Are you looking to take control of your own destiny and start your own business? Join us on November 18 when Phil Holland and Bill Topaz offer up a simple and easy tool to predict future cash balances and answer questions on starting home-based businesses and how to preserve cash. Phil and Bill are from My Own Business, Inc. - a 501(c)(3) nonprofit charity that, since 1992, has taught almost a half a million people how to start and operate their own business successfully. http://www.myownbusiness.org

Between them, they have over 70 years of experience of failure and success. Their advice is really where the "rubber meets the road". Most businesses fail because of mistakes that are made - mistakes that are avoidable. What is the mistake made most often? Just ask them.

 

 

Phil Holland was the founder of the Los Angeles- based Yum Yum donut shop chain - the largest privately owned donut chain in the country. But before he succeeded with Yum Yum, he was a serial entrepreneur. Through trial and error (mostly error) he learned what it really takes to start a small business.

 

 

Bill Topaz has worked for private and public companies, run divisions of major corporations, and has been a small business owner and wannabe entrepreneur. His practical experience encompasses all phases of sales and marketing, operations and finance.

 

 

Post your question here and then check back on November 18th at 2:00PM EST for Phil and Bill's response. You can also pose a question to them anytime during the event.
  • Re: Event November 18: Cash Flows and Preserving Liquidity
    SBC Team Master
    Currently Being Moderated

    Phil and Bill will be answering questions in the order in which they were received, but may not get to all of them within the event hour. Ask yours today to ensure it one of the first to be answered!

    During the event, be sure to refresh your browsers often to see the latest responses. During high volume, you might have to page forward.
  • Re: Event November 18: Cash Flows and Preserving Liquidity
    caffeinated Apprentice
    Currently Being Moderated

    Hi Phil and Bill,

    What are some of the major mistakes small business owners make in managing their cash flows? Do you have any tips to help avoid these mistakes? What if a small business owner already made them, how do they fix them?

     


    caffeinated
    • Re: Event November 18: Cash Flows and Preserving Liquidity
      MOBI.1 Newbie
      Currently Being Moderated

      Dear caffeinated:

       


      The worst mistake is not maintaining up-to-date cash flow projections so that future liquidity is maintained. The way to correct this mistake is to start immediately preparing monthly cash flow projections that reflect your best estimates of lower future sales.

       


      If you do any kind of annual budgeting, you should also consider doing multiple versions - one for what you think will realistically happen, one if revenues are 15% off, and a "doomsday" scenario. What can you do under each scenario? Also, ask yourself if there are any "early warning" signs that occur that could give you some extra time to get ready for a downturn.

       


      Another mistake is not lining up sources of cash well before a liquidity crisis is forecast. Potential sources might include: additional credit cards, family, friends, bartering with vendors, asking for longer purchase terms, landlord concessions, pursuing your accounts receivable, SBA guaranteed loans. When you go down this road, however, be sure to take into account all of the terms. For instance, it may be embarrassing to ask friends or family for help, but they probably won't charge you the same high interest rate you would incur if you built up a large credit card advance balance.

       


      See our answer to Vince for a few thoughts about receivables and payables.

       


      As for how to fix mistakes, the smart-aleck answer is, of course, don't make them to begin with but if you do ..... good communication usually helps. It may not solve the problem but it can help make it easier. This is true for vendors as well as employees. You probably don't like unpleasant surprises and neither do your suppliers. If you think there's going to be a problem, let them know... they'll usually appreciate the candor and forewarning. If you have to save on personnel costs - cut benefits, eliminate overtime, etc. - let the employees know what's happening ahead of time because they need to plan too. They might not find it pleasant but cuts for an understandable and justified reason will many times gain acceptance. It's certainly a better alternative that non-survival and being out of a job. Just like our recent Federal bail-out, a bad situation was made even worse by bad communication.
  • Re: Event November 18: Cash Flows and Preserving Liquidity
    Vince Novice
    Currently Being Moderated

    Phil and Bill,

     


    Thanks so much for taking time out of your schedules to participate in the SBOC!

     


    We've all heard that a good way to manage cash flow is to be on top of your account receivables, and prolong account payables for as long as you possibly can. In these times, won't everyone be trying to implement the same strategy?

     

    Thank again!
    Vince
    • Re: Event November 18: Cash Flows and Preserving Liquidity
      MOBI.1 Newbie
      Currently Being Moderated

      Dear Vince:

       


      You're absolutely right - many probably will be trying to implement the same strategy, just as a cliché becomes a cliché because its true. On the other hand, there's no reason why you can't do it better.

       


      But first, we have to state one thing .... Good management of payables and receivables should not be reserved for bad economic times; practice it every day. Just because times may be okay is no reason to get lax.

       


      The best policy to manage cash flow during slumps is to lower costs and maximize sales of high-value, low cost goods or services. Yes, being on top of accounts receivable and obtaining timely payment is important. There are a few things you might want to consider to help. If your margins allow, you might consider offering a discount (perhaps 2%, maybe more) for either prepayment (cash or credit card) or payment within a short period of time (10%). Another thing to consider is implementing a finance charge for any balances over 30 days - but be sure to confer with counsel as to what is legally required and what the limits are. We wouldn't advise doing this unless you are prepared to actually impose the charge. Depending on your business, you might also consider requesting an up-front deposit. Be careful though as you don't want to be so severe that your customers will go someplace else.

       


      Controlling payables is another important activity. Be cautious, though, about prolonging payments as that can be risky without first securing agreement of the vendors. Better to maintain pristine relationships with vendors to get best prices and service. If you need to extend your payment times, be sure to communicate with the vendor. They don't like unpleasant surprises either. Usually mutually beneficial programs can be worked out. But,as always from us - a word of caution. All the good will you earn by communicating well can go flying out the window if you don't keep the commitments and promises agreed upon. That will only make the situation worse. Only promise what you can live with.

       


      Another thing that can offer some modest relief is to be keenly aware of vendors billing cut-off dates. For instance, if your vendor invoices at the end of the month and gives you 30 day terms, then order everything during the first week of the month. Voila! You just got almost 60 day terms. Likewise, if you buy using credit cards, make the purchase just after the end of the billing period. Being careful this way can give you up to an extra 20-30 days without rocking any one's boat.

       


      And as with receivables, if your margins and cash flow allow, take advantage of cash discounts for quick payments or advance payments. In fact, when sourcing vendors, with product quality and service being equal, go to the vendor that will give you the best terms - just in case. And remember, the nicer you are to vendors during good times, the more likely they are to help you and to be understanding during lean times.
  • Re: Event November 18: Cash Flows and Preserving Liquidity
    flex_00 Newbie
    Currently Being Moderated
    What are some precautionary measures that I, or any small business owner, can implement now to protect myself in these tough economic times?
    • Re: Event November 18: Cash Flows and Preserving Liquidity
      MOBI.1 Newbie
      Currently Being Moderated

      Flex_00:

       


      Good question. It's always good to ask this early on so you can avoid taking really Draconian measures later. The earlier you start, the less painful it might be at the other end. And it will also avoid the worst possibility, at some point in time, in finding yourself with a negative cash balance and no where to go.

       


      Businesses that run out of cash are like airplanes that run out of fuel in mid-air - they coast for a very short period then crash and burn, leaving few survivors. This may be harsh but it's the reality.

       


      So, first and foremost, take all measures necessary to preserve future cash/liquidity. This can be done by looking into the future and making a projection of what you anticipate as to diminished sales and, at the same time, estimate what your costs will be. This should be done on a monthly basis and the cash flow projection should cover, at least, the next six months. And remember - always underestimate revenues and overestimate expenses.

       


      At the same time, look at everything you do. Do you really need brand name office supplies - generic ones are usually cheaper. If you need to send something FedEx, does it really have to be there first thing in the morning the next day or can it be anytime the next day - there's a big price difference. Can you modify either your product or service so as to be able to offer your customers more high-value, low-cost items. Keep in mind that Wal-Mart is doing exceptionally well in these difficult times by following that practice. For example, if you have a wine shop, consider focusing on highly rated wine that retails for $10 a bottle or less. Do you belong to any kind of association because sometimes groups have buying programs offering lower prices.

       


      Also look carefully at resource planning. If you have a retail business, analyze when your business is coming in the door. Do you really need to be open at 9am? Do many sales happen after 5pm? And what about staff? How many people do you really need at any given time or day? Can you cut some hours or put some people to 4-day work weeks (They might like that because it cuts commuting costs by 20%).

       


      These are just a few .... But you'll get the idea. Be creative.
  • Re: Event November 18: Cash Flows and Preserving Liquidity
    SBC Team Master
    Currently Being Moderated

    Welcome Gentlemen,

     


    Thank you in advance for participating!

     


    It's always a great idea to have an accountant to either manage your books or at the very least, review them. If a small business owner can not afford to hire one at the moment, what do you suggest they do? Especially if they're tough shape right now.

     


    The SBOC Team
    • Re: Event November 18: Cash Flows and Preserving Liquidity
      MOBI.1 Newbie
      Currently Being Moderated
      Like sports, no serious ball team takes the field or court without a way to keep score. Accounting and timely financial information is mandatory.

       

      If resources are not available for an accountant, a simple accounting software package is a must. Something like QuickBooks or Peachtree. They have tutorials to help guide the user.

       


      However, before getting started, a small business owner should also educate themselves in basic accounting principles. A lot of this can be found online for free. Also, modestly priced courses can be found perhaps at a local junior college, extension program or night course somewhere.

       


      Also, if you are doing it yourself, have a professional at least review once a year and help you with taxes.

       


      Another possibility might be to ask someone in the family who might have some level of knowledge or expertise and that may be able to help you evenings or an occasional weekend. Don't ever be afraid to ask for help or favors.

      Ask your local bank. They may even help have the resources to help you out.
  • Re: Event November 18: Cash Flows and Preserving Liquidity
    Tori Novice
    Currently Being Moderated
    Hi Bill and Phil,

    What administrative functions do you suggest a small business owner outsource to save time and money?

    ~Tori
    • Re: Event November 18: Cash Flows and Preserving Liquidity
      MOBI.1 Newbie
      Currently Being Moderated
      Tori:

       


      Without hesitation, the first thing you should outsource is Payroll. It's inexpensive to outsource. It can be complicated to do yourself and the potential for making an innocent mistake is high. The payroll service provider will take care of handling all the deductions and reporting. They will also provide the end of year W-2 forms.

       


      If you are manufacturing a product, you should look at outsourcing production. Perhaps your product could be made cheaper off-shore. Or the capital needed to buy your own equipment may be too high. The same goes for distribution and warehouse. You need to do a detailed analysis comparing costs. Other things to factor in, though, include service and quality levels of outsourcing vendors. With outsourcing you may lose some control.

       


      If you have a service, office-based business, you might consider using an "office suites" firm that can provide an office for you and central reception, conference area, and other support services. There are also technology firms that can provide a full suite of telecommunication services so you don't need your own reception area.

       


      A lot of this is dependent on the specifics of your business.
  • Re: Event November 18: Cash Flows and Preserving Liquidity
    SBC Team Master
    Currently Being Moderated
    Hello Community,

    Please join me in welcoming Bill and Phil from My Own Business, Inc.

    They will be posting as MOBI.1 today.

    Take it away guys!
  • Re: Event November 18: Cash Flows and Preserving Liquidity
    Interpreter Newbie
    Currently Being Moderated
    If I have a steady revenue stream, should I really be concerned about my cash flow? Am I missing the bigger picture?
    • Re: Event November 18: Cash Flows and Preserving Liquidity
      MOBI.1 Newbie
      Currently Being Moderated

      YES! The answer is always yes. Sales and earnings are not the same as cash flow. You need to always be thinking about cash. It's possible to be earning money and still go broke.

       


      An example: What if you sell a product that your customer can pay for over time (not using a credit card) like a mattress ... but you have to pay your supplier within 30 days. You've made a profit but you don't have all the cash yet. Another example would be a growing restaurant chain who expands too quickly or a magazine publisher who collects one year subscription money and has to service the reader for a year - in other words, don't spend the cash right away because you have future obligations.

       


      As our fathers used to say, be careful you don't success yourself out of business.

       


      This is also a good time to suggest that when you do a cash flow projection, do more than one version. Make believe that your good fortune won't continue. What would you do? You should always have a good, well-thought out contingency plan. Don't ever be complacent. Surprises have a nasty way of happening.

       


      Another example: If a restaurant is beginning to experience a drop in sales, maybe they should prepare a cash flow assuming a 20% sales drop and another one at 40%. Remember Boy Scout 101 - Be Prepared.
  • Re: Event November 18: Cash Flows and Preserving Liquidity
    SBC Team Master
    Currently Being Moderated
    Bill and Phil,

    If a small business owner's sales dropped significantly from the previous year, and is reluctant to lay off the 2 or 3 employees that work for them because they are excellent at their job and will need them when business recovers, what would you suggest they do?

    The SBOC Team
    • Re: Event November 18: Cash Flows and Preserving Liquidity
      MOBI.1 Newbie
      Currently Being Moderated

      Consider re-organizing work shifts. Instead of 5 days, cut some to 4 days. Maybe shorter days. If they're really valuable employees and you can afford it, make sure you don't cut hours to below the minimum needed to retain health benefits.

       


      We always suggest good communication. The employees need to understand what is happening. In order to preserve their jobs, you might need to cut salaries by a percentage. Not pleasant to your staff but better than losing their job and benefits in today's marketplace.

       


      If this is just a momentary problem, perhaps you can get one of them to take a short "leave of absence". If it's going to be longer term and worse than that, you may have to let people go to maintain liquidity and protect yourself. Unfortunately, personnel costs are usually major line items for each business and it's difficult to totally avoid staff reductions.
  • Re: Event November 18: Cash Flows and Preserving Liquidity
    SBC Team Master
    Currently Being Moderated
    Great responses guys!

    Community, we have about 15 minutes left before we wrap things up. Get those questions in!

    Thanks,
    The SBOC Team
  • Re: Event November 18: Cash Flows and Preserving Liquidity
    SBC Team Master
    Currently Being Moderated
    For business owners that know they'll need cash in the near future to keep their business going, what advice can you give them?

    The SBOC Team
    • Re: Event November 18: Cash Flows and Preserving Liquidity
      MOBI.1 Newbie
      Currently Being Moderated

       

      Start now to line up future cash needs. Potential sources could include: additional credit cards, family, friends, bartering with vendors, asking for longer purchase terms, landlord concessions, pursuing your account receivable, SBA guaranteed loans. Also focus on selling high-value, low cost merchandise or services.

       


      If your business includes an inventory of goods, try to work the inventory down i.e. convert inventory to cash.

       


      Be careful of the credit cards because of the high interest rates.

       


      It's good your thinking ahead. Cut costs to start building up a cash reserve. Talk to all of the sources. Make sure you have a plan you can articulate as to how you're going to pay back their generosity and make keep your promises. Also, ask your professional team - accountants and lawyers - for their advice, as well as other business owners and entrepreneurs.

       


      If nothing else works out, you might have to consider an outside investor or taking on a partner or combining with another, similar or complementary business.
  • Re: Event November 18: Cash Flows and Preserving Liquidity
    SBC Team Master
    Currently Being Moderated

    On behalf of the SBOC Team and the members of the Small Business Online Community, we wanted to say we truly appreciated your time today and your professional responses to user questions.

     


    Community members, while our session has now concluded, please feel free to discuss today's session and the questions answered. Again, if you'd like more information about My Own Business, Inc., visit:

    http://www.myownbusiness.org

    Thanks again,
    The SBOC Team

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