Managing cash flow for small businesses

Managing a small business requires understanding cash flow.

The business operation is more than selling a product or service and finding new customers. Managing money and projecting how much cash is needed to finance operations keeps a company of any size profitable and aware of financial dangers.

Start with these 7 tips for managing cash flow:

1. Increase the amount charged to customers
2. Decrease the amount of money owed to you-- get customers to pay their bills
3. Cut out excess overhead expenditures – consider leasing or renting equipment instead of making large purchases using cash reserves or high interest debt
4. Track inventory closely and don’t overstock
5. Don't overpay taxes
6. Review owner's pay - secondary income may be valuable to the success of many small business ventures in the early years
7. Consciously structure the payment of bills - pay bills closer to the deadline but do not incur late fees

This is an excerpt from an online article "Cash Flow-In and Out" by Nancy Blondin, CPA, writing on the Website "Tennessee Society of Certified Public Accountants" and is an excellent article on the basics of managing cash flow:

"Cash is needed to acquire supplies, equipment and other assets that a business requires to accomplish its business purpose. Cash is needed to pay wages, operating expenses, taxes, interest and principal to creditors, and dividends to stockholders. It allows management to carry on its business.

A thorough understanding of cash and how it flows in and out of an organization will allow you to answer the following four questions:

1. How much cash does my business have?
2. How much cash does my business need to operate, and when is it needed?
3. Where does my business receive its cash, and spend its cash?
4. How do my income and expenses affect the amount of cash I need to expand my business?

If these questions can be answered, you are truly managing your cash flow."

A business owner needs to have in place and understand:

• Cash Needs and Policies
• Financial Statements
• Net Income vs. Net Cash Flow
• Cash vs.Liquidity
• Cash Budget
• Bookkeeping Techniques

Basic accounting and bookkeeping is essential for all businesses - but especially small businesses.

I asked Seth David of Nerd Enterprises "what is the number one accounting and cash flow mistake that all small businesses make?"

The biggest mistake I see businesses make is that they don't plan. When I moved to California I was living in a half way house. Before I took a job, I had to add up what my expenses were going to be each month so that I could see what I needed to earn at a minimum to live.

It wasn’t much, but if I just went and took a job without knowing, I could have found myself in a situation where I wasn’t making enough money to pay my bills. So when I sat down in the first job interview I already knew what I needed bare minimum. I padded the amount in case I may have missed something, and in all likelihood I would need to add expenses along the way.

Of course I wanted to further pad that so that’s where the negotiating comes in. When I am looking at jobs I know I need to look at jobs that are paying at least as much as I need at a minimum.

Now let’s say I find that for what I do, jobs simply aren’t paying that much. I have to go back to my budget and adjust the income based on what I think I can get. From there I look at the net to see if I am short and if so by how much.

If I am short I have to make adjustments somewhere, starting with things I don’t really need and then seeing if I can live with “less” of the things I do need.

Control business finances with a thorough record keeping and organizing financial statements.

Set up a Quickbooks accounting system. There are Quickbook systems for specific industries such as small construction companies and retail outlets.

Here is a good cash flow tip from the book Starting Your Business.

Author Peter Hingston writes:

"keep receipts and invoices for everything you buy in connection with your business . . . the purpose of keeping invoices is so that you have proof of purchase and can justify all your expenses to your accountant and any IRS agent.

"Write the last three digits of the check number boldly in red ink on an outside corner of the invoice so that it can be easily cross-referred to your check book and financial statements."

Separate invoices in to paid and unpaid statements.

For most small businesses, hiring a bookkeeper as an independent contractor is a wise use of cash flow. For companies with fewer than 15 employees, most bookkeepers may only need to work on a system for 5 to 7 hours per week to maintain it.

A business in Southern California had to carefully manage cash flow during the first three years as it started up and sold products to retail stores in the United States and eventually Canada.

The company didn't pay cash or incur debt to purchase and stockpile inventory in the start up phase.

"When we started, we started with very little money," said Jason Carr, co-founder of Softline Home Fashions with brother Rodney Carr.

Softline Home Fashions, located in Gardena, just south of Los Angeles, imports quality polyester fabrics and sells to independent retail outlets and mass merchandisers.

He told me how they started generating their initial cash flow: "Some guy would have a stock lot and we'd go and re-sell it to generate capital. We started taking trips to China to buy more of a regular running line.

"We used factors. People take a certain percentage of the invoice and they collect on receiveables paid to them."

Financing the start up for Softline Home Fashions required a careful strategy of showing samples to the retail outlets, determining which fabrics were going to sell, and then requesting the fabrics from suppliers in China and Indonesia. The product was then shipped and sales made to the retail outlets and then the suppliers were paid.

So where are bookkeepers found? Certainly through a local chamber of commerce and business networking groups.

Hiring a bookkeeper?

Ask if they have certification from an organization like the American Institute of Professional Bookkeepers http://www.aipb.org. There are 30,000 members. The mission of the organization is "to keep bookkeepers up to date on changes in bookkeeping, accounting and tax; answer bookkeepers' everyday bookkeeping and accounting questions; and certify bookkeepers who meet high, national standards."

There's also the National Association of Certified Public Bookkeepers, www.napcb.org, that has a mission "to protect the public interest by helping to ensure that only qualified individuals provide public bookkeeping services and assure the public that members are trusted and competent bookkeepers."

The NACPB has billing rates at $ 60 per hour and up.

Bookkeeping is a strategic expense for any business at any stage. For most small businesses, a bookkeeper is normally needed three hours to five hours weekly once records are in order.