Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
ENTREPRENEURS TEND TO get preoccupied with sales growth figures and operating expenses, if not with vision and stamina and other more dramatic business subjects.
But cash flow needs careful management, especially in tough economic times, and so do three major balance sheet components: accounts receivable, accounts payable and inventory.
Pay attention now. There may not be a quiz at the end of this article, but there is that upcoming appointment with your banker.
First, three cycles Effective management of a small company’s cash flow always begins with a firm understanding of its production, sales and collection cycles. Without a good grasp for how long it takes each of these cycles to run, entrepreneurs have no idea how much cash they need to free up.
The production cycle, which depends greatly on the focus of the business (is it a retail, wholesale service or manufacturing concern?), is determined by calculating the number of days it takes to obtain, prepare or put forth a product that’s ready to be shipped to customers.
The sales cycle is how long it takes to sell and deliver the finished product to the customer. The collection cycle is how long it takes to then receive payments.
There is no single factor that can impact a company’s cash more dramatically in an economic slowdown than its collection cycle. Wise small businesses develop ways to accelerate the collection process. Throughout our current slowdown, I’ve seen an increasing number of intelligent small-business owners establish discounts for timely payments and charge fees for clients carrying accounts receivable longer than term.
Once the length and costs of production and collection processes are analyzed and understood, entrepreneurs should take long, hard looks at the balance between their cash inflows and outflows before making inventory decisions.
Keep track of how quickly payments need to be made for supplies, raw materials or finished products and budget for these payments alongside other operating expenses. Because companies generally need to compensate suppliers for materials and finished products well before collections are made from clients, an immediate gap is created in the company’s cash flow.
That gap will create a financing need that must be filled with company cash, equity or outside sources such as bank lines of credit. And when a bank is involved, the relationship between an owner and a banker becomes critical.
Take it from one banker: A lack of attention to accounts receivable is one of the major pitfalls in many small businesses. Stay on top of them or risk jeopardizing your business.
Vendors on your side Likewise, it’s not an overstatement to say that strong relationships with vendors can help mightily to sustain cash flow in a slowdown. Put effort into developing long-term vendor and supplier relationships that are mutually beneficial.
Don’t miss out on opportunities to receive discounts by making advance payments to vendors. Often, these discounts can reach as high as 2 percent per month and can have a dramatic effect on the company’s overall profitability.
There’s still more to pay attention to: proper inventory management. The raw materials or finished products that make up this large balance sheet category represent, in many companies, the largest single use of cash.
Inappropriate management of inventory is often the result of inadequate inventory control systems and can result in financial distress. Inventory shortages can lead to lost sales opportunities and the ultimate loss of valued customers if the finished product cannot be shipped in a timely manner.
Overstocking of inventory can be equally as dangerous, resulting in a high carrying cost for the inventory or an obsolete inventory, which must be written down as losses on the company’s books. When it comes to reducing overstocks, the choices aren’t attractive. You can cut prices to move inventory more quickly, or you can return inventory to suppliers, often at a significant discount or restocking charge. In either case, net profits suffer.
It’s nearly impossible for business owners to keep track of these important financial details without effective accounting systems and financial controls. That’s where a trusted accountant or accounting firm comes in. Once those systems are in place, business owners can understand the company’s financial position each and every month, and give high-quality financial information to bankers to get lines of credit or other financial products.
Even with carefully planned business models and crystal-clear vision, many entrepreneurs fall short of their financial goals if they do not practice effective financial management. Good record-keeping, close collaboration with financial professionals and vendors, attention to accounts receivable and payable, and effective inventory and cash management are all key areas that will help owners control day-to-day operations.
Then they can concentrate on more appealing elements, such as doubledigit sales growth and long-term profitability.
[contact] Dick Flesvig is executive vice president, chief credit officer and senior lending officer at Cherokee State Bank in St. Paul: 651.227.7071; www.cherokee-bank.com
