Rethinking your procedures can pay off in the long run.
February 1, 2012
Every restaurant owner knows the trouble that comes with managing the ins and outs of cash flow. You can have tons of loyal customers and be an expert at getting new business and still be kept awake at night with cash flow worries.
“Cash flow problems have a habit of sneaking up on a business, especially in a rocky economy,” says Tage Tracy, coauthor along with John A. Tracy of Cash Flow For Dummies (Wiley, 2011). “If a business is earning a profit, many business managers simply assume that cash flow is satisfactory. But even if profit is good, cash flow can be bad.”
Cash flows pose an unending challenge to business owners and managers because they have to be carefully managed. Tracy explains what you can do to make 2012 the year of the cash flow reboot for your business.
1. Respect and understand financial statements. According to some surveys, 25 percent of businesses don’t even maintain accounting records (let alone produce financial statements).
“The bottom line for small business owners is simple,” says Tracy. “If you don’t make an effort to prepare, review and completely understand your financial statements, then you need to ask yourself why you’re in business in the first place. And this especially holds true for the statement of cash flows, because an abundance of invaluable information is available from this most commonly overlooked and mismanaged financial statement.”
2. Plan, do projections and plan some more. Proper planning is essential to the launch, growth, management and ultimate success of your business as measured by the ability to generate profits and, just as important, to avoid running out of cash. According to Tracy, “Having access to sound financial plans structured for different operating scenarios is an absolute must.”
3. Focus on capital and cash—the lifeblood of your business. One of the most common reasons small businesses fail is that they lack adequate cash or capital, not only to survive difficult times, but also to prosper during growth opportunities.
“Remember, one of the greatest losses a small business can realize is that of lost opportunity, which has its roots in not being prepared to properly capitalize on market opportunities,” explains Tracy. “The harsh reality is that this great loss is never accounted for or presented in any way, shape or form on the business’s financial statements. Rather, missed market and business opportunities lurk in the torturous thought, Imagine what I could have achieved!”
4. Manage your disbursements cycle. To counteract the selling cycle cash consumption machine, businesses need to understand that the disbursement cycle (managing expenditures and cash payments to vendors, employees, and other creditors) can be leveraged and managed to be a primary source of cash for your business.
“Invoke what’s called the matching principle,” advises Tracy. “That is, similar to properly matching revenue and expenses to ensure that an accurate measurement of a business’s profit or loss is obtained, you should be able to match cash inflows and outflows.”
5. Be creative to generate cash. Two three areas offer significant opportunities for creativity when looking to improve cash flows:
• Leverage your vendors, suppliers and financing sources. They don’t want to lose your business, so placing just the right amount of leverage on these groups can result in enhanced cash flows because liabilities offer a source of cash.
• Manage external sources of cash proactively. Proactively manage your relationships with banks, leasing companies and even the federal government to ensure that cash is made available when needed.
6. Balance your balance sheet. Many businesses overlook the concept of properly managing the financial structure of their balance sheet, which has gotten more than a few businesses in trouble.
“Your business needs to strike a proper balance between making sure that current assets are financed or supported with current liabilities,” notes Tracy, “and making sure that long-term assets are financed or supported with long-term sources of capital such as a five-year note payable or equity. Every business should strive to achieve a financial condition that ensures constant maintenance of adequate levels of both solvency—the ability to pay all just debts—and liquidity—the ability to quickly access cash to support business operations.”
7. Protect cash at all times. Cash has a unique characteristic unlike other assets that makes it highly susceptible to additional risk of loss: Cash is an extremely liquid and marketable asset.
8. Follow the CART approach. CART equals complete, accurate, reliable and timely. Your financial and accounting information system needs to produce complete, accurate, reliable and timely financial information, reports, data and so on, which you can use to make informed business decisions.
“When you have the proper systems in place and know what to look for, you can keep cash flowing, helping you to grow a successful business,” says Tracy. “Let 2012 be the year you place a renewed focus on properly managing your cash flows.”
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