Get a Grip on Cash

by Henry Dubroff and Susan J. Marks from Battling Big Box: How Nimble Niche Companies Can Outmaneuver Giant Competitors

For too many small businesses, dollars and cents don’t always make sense. But they can and should if – as the business’s owner/operator – you take the commonsense approach. Enthusiasm and a good idea simply aren’t enough for long-term success. The numbers must add up, too.

That doesn’t mean as a business owner you also need to be an economist, a math wizard or a number-cruncher, but you better have a business plan and an understanding of your cost structures and more if you intend to succeed.

Plenty of sources, from community colleges to universities, schools, industry and professional organizations, books, magazines, the Web, myriad consultants and other options, are available to help you learn what you need to know.

Business finance 101

Rule number one, according to CableOrganizer.com’s Valerie Holstein, is quite simple: If your business doesn’t have the money to do something, don’t do it. If, for example, you need more staff but can’t afford the expense of additional full-time employees, consider other options such as contract or part-time workers. Never add employees you can’t afford, says Holstein, a CPA by trade.

Cash concerns

One of the fundamentals of business is to know the difference between cash and revenues. Revenues do not equal cash. Those figures on your financial statement don’t equal what’s in your checking account, either, because of irritating details such as depreciation, accrued expenses and more. What’s worse, your business’s checking account may be flush right now, but what about the deluge of bills due before you’re likely to get another shot in the arm of revenue? Don’t be discouraged if that’s your business’s modus operandi. You’re not alone. These are very real issues faced by all businesses, especially those with products or services that go out the door before the paycheck comes in. It’s your job as the business’s owner/operator to keep track of the cash – on a daily, weekly, monthly and annual basis.

Be careful, too, not to lose sight of the fact that the $30,000 in your checking account on Monday doesn’t go very far if $15,000 in rent is due on Friday and you’re $45,000 in arrears to your biggest supplier.

You can, however, lessen your chances of coming up short when it comes to meeting those financial obligations in a timely manner. Let’s take a closer look at how some successful small businesses handle the conundrum of cash.

Working capital

Working capital is the cash – or fast access to it – that you as a business’s owner/operator have on hand to use at any given time. It’s something many small businesses, start-ups or not, often run short of.

That lack of access to working capital is the single biggest challenge small-business owners face today, says Go Ask Alice (www.goaskalice.com) columnist Alice Magos, an accountant and certified financial planner. Small-business owners absolutely must pay attention to precise and constant cash-flow planning, inventory micro-management, and aggressive receivable collections to overcome the cash dilemma, she adds.

“Entrepreneurs fall into the cash flow trap because they are optimistic by nature. If they weren’t, they wouldn’t be starting a business,” says John J. Huggins, successful entrepreneur, angel investor and member of the board of directors of the Pacific Coast Business Times. He’s also a chief business confidant/advisor.

The right amount of working capital for your business depends on your industry and more, but various consulting sources, bankers, industry organizations and even the SBA have (and generally will share) useful rules of thumb for how much working capital, capital per employee, and more is required for your business.

“I would encourage people to seek out those yardsticks and measure themselves,” says Huggins. “They are not strict rules that every business needs to meet. But they do give you a sense of how you compare financially to your peers and can show you – regarding amounts of working capital, for example – where you might be more vulnerable than you think. They also help you understand how someone who may provide financing – whether debt or equity – will look at your business. Even if you don’t think a certain rule of thumb applies to your business, it may be the lens an investor is going to view you through, so you might as well know what it is and how it looks.”

Pay attention to patterns

Whatever your business, you can start with ballpark estimates of your inflow and outflow. Keep in mind, though, that only through time and by trial and error will you uncover the real dollars and cents that govern your business. The key is to pay attention to the numbers and recognize the patterns that develop.

Keep track of your cash

A simple worksheet like this can help a small business keep track of cash in any given week. Try rounding your numbers to the nearest $1,000.

Cash-in/cash-out
Checking account balance: $32,000
Checks and cash received: $20,000
Checks written to vendors: $11,000
Credit card payments: $2,000
Payroll, including taxes: $23,000
Closing balance: $16,000

The “b” word

An essential financial discipline is a budget. It’s a very good tool for even a small company to use, says Peter Iannone, director of CBIZ/MHM, an accounting, tax, and advisory services firm in Los Angeles. A budget helps you think into the future and see that good financial periods will have to carry the business through slower ones if you expect it to survive.

What the budget looks like or how it’s compiled isn’t as important as putting it together and having the document as a reference point.

If you don’t have a head for business and aren’t a number-cruncher or a computer geek, consider taking a class or workshop in QuickBooks or Excel before you start on your budget. The budget needn’t be complicated, but it should be thorough. In fact, you absolutely don’t want the budget to be so complicated and cumbersome that it’s never used, says Iannone. Additionally, it should cover one complete business cycle, such as one year, or, in the case of a new business, the period from initial investment to positive cash flow.

Here at the Pacific Coast Business Times, the annual budget is farily detailed by cost category for revenue and expenses. Additionally, on a weekly basis our part-time bookkeeper provides a report with only four lines:
• Cash deposited
• Checks paid
• Total accounts receivable
* Total accounts payable

These four numbers tell us if the company has generated enough cash during the week to pay the bills and to meet roughly half the payroll. (We pay twice a month.) From the ratio of accounts receivable to accounts payable, we can tell if the future likely will generate enough cash to continue operating without using our credit line. A ratio of at least two to one usually will do the trick. (For example, accounts receivable of $120,000 versus accounts payable of $60,000.)

Your credit line

The credit line – your business’s ability to access quick cash up to a set ceiling – can be a great tool if revenues come up short one month. A credit line also can be a fail-safe backup for a payroll account in case of a slight miscalculation or if you didn’t transfer quite enough cash to your company’s payroll account. The cost of the backup is minimal and certainly well worth it to avoid the headache and hassle should the account fall short.

A more sophisticated option to a line of credit is short-term financing against receivables, says Iannone. This tends to be good for growing companies or ones with variability in their accounts receivable, because the line grows and shrinks with them as opposed to an ordinary line of credit, which is a static number.

One big caution, though, when it comes to borrowing: If you borrow to smooth out your cash flow, run through the numbers to make sure your business’ profitability supports the cost of borrowing, Iannone adds. “You will pay in current terms probably about 7 to 8 percent (interest) on an annualized basis. So if your overall profit margin is 4 percent, a loan may very well take away all or a good portion of it.”

Take advantage of trade terms

Pay your bills, says Chris Zane of Zane’s Cycles, and your vendors may offer you special deals. Depending on your business, a special deal could be excess inventory offered at a discount, lower prices, favorable terms and more. Better still, pay your bills early and take all the anticipation. That’s the interest payments that would have been due. “If there is an opportunity to save a point or 1 percent a month on your cost of goods, if you amortize that over 12 months you get huge discounts off the inventory that you’re buying. Managing your money, paying your bills, understanding inventory terms – those are all really important. If you look at the people who are competing in the marketplace today who don’t understand that, they go away pretty quickly,” says Zane.

Bottom lines

Says entrepreneur, small-business woman turned researcher, author and expert Martha Rogers: “I think the toughest part for many small-business owners is to recognize that all the financial details and more aren’t the focus of your business, even though it feels like it. You have to get the licenses from the city; handle the lawyers; work with the accountants to get incorporated; fool with taxes; hire your staff; make sure your payroll is set up, plus you have to set up your store or your product for sale. You have so much to do, and the easy part is to forget the whole reason why you’re here. And that reason is the customers you have.

“It seems obvious, but the fact is you don’t have to have a product to get a business going. What you do have to have is a customer. That’s probably the most important, number-one thing for a small-business person to remember. It’s your customers who mean you have a business, and all the rest of it is what you do to have customers. You would be amazed at how many companies forget that. Ask a CEO of a very large company where her revenues come from and the answer likely will be, ‘From our great products.’

“Oh, really? Your products pay you money? Well, they don’t, but even very smart people forget that.”

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Reprinted, with permission of the publisher, from Battling Big Box: How Nimble Niche Companies Can Outmaneuver Giant Competitors © 2009 Henry Dubroff and Susan J. Marks. Published by Career Press, Franklin Lakes, NJ. 800-227-3371. All rights reserved.

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Henry Dubroff is founder and editor of Pacific Coast Business Times. Despite operating in the shadow of the region’s big-box competition in Los Angeles, Dubroff’s publication reached break-even just 18 months after launch and continues to maintain double-digit growth rates. Previously, he won numerous national awards for excellence in journalism. His entrepreneurial accomplishments have been recognized by the U.S. Chamber of Commerce, the U.S. Small Business Administration, and the California Legislature.

Susan J. Marks is an award-winning journalist, freelance writer, book author, and editor. In nearly 30 years of newspaper, magazine, and book writing and editing experience, she has chronicled large and small business successes and failures, innovations, and changes.