Buddy Can You Spare a Dime?

With or without a double dip, Monday morning usually means the start of another work day for a small business.  This week in particular is a good time to review how effective your cash management strategy is, and if you don’t have a cash management strategy, a good time to implement one.   There’s a great Open Forum piece on this that lays out 3 areas to look at in your business to get a better handle on cash.  Their first piece of advice is to plan how you think cash flows will look for the year.  If you didn’t start the year with this, it’s never too late.  Their second point is to make sure you get paid.  Review when and how you bill, and then when and how you do collections.  Add to that, when and how you give credit.  A client who operates almost exclusively on credit told me he’s improved his credit granting process to the point where he doesn’t think about bad debt allowances.  He’s confident if the customer made it through the credit process, he’ll get paid.  Finally, the Open piece talks about the importance of benchmarking how cash is flowing vs. what you thought would happen.  Needless to say the two are not always the same. 

This brings us to the topic of Plan B.  While I am an advocate for and user of Plan B, I would also tell you to take extra steps in setting up Plan A, so Plan B is more of a safety net than a likely outcome.  As you look to manage cash flow, make sure you have someone with expertise to talk to, so both your time and money are being invested wisely.  If you can get a line of credit, do so now rather than when you need it.  That’s when it won’t be available.  If you can afford a cash reserve, set one up.

The other obvious, but not necessarily well used cash management tool is focus on cost management.  Angel Business Advisors put together some great practical tips for studying your costs.  I was taken by this list because if reflects things you can do even if you’ve already done cost cutting.  On the first round you cut what you can do without.  A next step is to think about lower cost or free substitutes, as well as reducing utilization.  Sometimes you can share resources and the cost. The same client I talked to about credit has also saved serious money by deferring capital purchases and renting instead.  While small businesses have difficulty accessing capital, interest rates for big companies are at historic lows.  Renting from a big firm can help you arbitrage the credit market.

The persistent economic uncertainty inevitably flows to small business as inconsistent access to credit.  There’s only one solution to that, and it involves cash.   

Cash is Still King

I spent time this week working on the financial statements of a small company that does very effective cash management.  In this case, the company has a fairly high transaction volume along with peaks and valleys in cash flow, so doing it right isn’t easy.  This reminded me that as much as it’s important for entrepreneurs to be conversant in the best technology for their business, finding the best way to manage cash is arguably equally important.  Borrowing for working capital is still a problem, regardless of large bank proclamations to the contrary.

Bank lending has increased, but there are still many people with viable businesses who want loans and can’t get them. Often, the issue is the type of business.  It’s all about collateral.  If you don’t have it, or it isn’t easy to negotiate, you have a problem.  Even with collateral, a recent New York Times article recounts the difficulties of getting loans from large banks, the timing and red tape that hamper getting an SBA loan, and the growing complexity of loan options.

 

For those looking outside the banking world, it gets even tougher.  As explained on the blog Slingshot Cafe, private funding sources tend to divide the world into two business types.  Venture businesses (as in someone thinks they’re going to make a large “yacht-load” of money) and lifestyle businesses (as in it might make some money, but it’s not the next Google).  If your business falls in the first category, you have a chance at angel or VC funding.  But that’s a small group of businesses.  The remainder, which can include many viable growth businesses (just not hyper-growth) need to get creative.

Adding insult to injury on this capital raising front, we’re not just talking a true small business problem.  A recent Grant Thornton study shows it’s getting harder to get listed in the capital markets.  Since 1997, the number of companies listed on US exchanges has declined 42%, and it’s been a straight line down from the start.  This all has to do with the economics of investment banking making it hard to make a buck (OK a giga-buck) at doing IPOs for less than massive companies.  Another big factor (bad pun alert) is consolidation among public companies.  The study calculations on how many IPOs would be needed to reverse the trend is like reading how long it’ll take to get unemployment numbers down.

That said, it seems impossible that funding for new companies will be a persistent problem.  A side effect of reading Horatio Alger books at a tender age is that I believe there is too much money to be made for capital not to flow to small businesses.  It’s really the reverse argument of the mortgage crisis.  If you underwrite loans carelessly you won’t make any money.  On the other hand, if you don’t make loans except to select few, there’s not much money left in the end either.  Still, as the saying goes, “in the long run we’re all dead”, so in the short run managing the cash you have in your businesses should be on your short list of tasks that must be done today, every day. 



Still in a Cash Crunch

As I’ve been cleaning up client books for tax purposes, there are two things that stand out about being a successful small business in 2010 (and therefore hopefully in 2011).  One is that all that cost cutting and focus on creative ways to get around the recession are starting to pay off in better margins.  The other is that cash flow issues surrounding late payments are still a big problem.  Everyone I looked at (and it’s mostly companies that have year over year revenue and margin growth) had more, older receivables than even in previous years.

I don’t see a statistically valid sample, (though at this point in tax season it sure feels like it) but among those who do see enough data to show definitive trendsetting in action, the conclusions are the same. 

According to an article in Bloomberg Businessweek, average accounts receivable collection for private companies went up by four days between 2009 and 2010 to 27 days.  If you’re waiting for payment from a large company, find something to do while you wait.  The average S&P 500 company pays in 59 days and collects in 46 days.  The data also shows credit agreements don’t necessarily help.  In 2010 average delinquent dollars went up from  12.5% to 14.3%. 

So besides being frustrated, what should your business do to improve cash flow.  Unfortunately it all comes down to the “eat your vegetables” common sense advice that is so common in business.  The fact is, if you pay attention to cash flow it will improve.  Some fundamentals to work on:

-           Check the buyer’s credit before you extend it

-          Get some payment in advance

-          Bill promptly and mention timely payment

-          Follow up on outstanding receivables

-          Reconcile your bank statement and your receivables every month

o   Notice repeat offenders and consider if the relationship is a net positive or negative to you.

§  Communicate the results of this analysis to the specific customer(s)

o   The reverse is also true.  Thank prompt payers with discounts and words (if applicable). As the mom of a 12-year-old I will tell you repeated positive reinforcement can institutionalizes good behavior.  (Haven’t found the miracle cure for the reverse problem.)

While late payers are an insidious problem that cost you serious money, paying attention and responding persistently can make all the difference.