Do you get frustrated when you see your monthly or quarterly P&L reports? You show a profit but your bank balance says differently. Are you scrambling to make payroll every week or every two weeks? Do you have to stretch out paying your vendors longer than the terms they give you?
How can it be that the business is making a profit, but you have no cash? There is a solution.
Your Accounts Receivables
First thing to look at is your receivables. Are your accounts receivables higher than your accounts payable? If so, that is a positive. Do you offer terms with your receivables that are longer than the terms your vendors give you to pay your payables? If so, that is a problem. Do you offer an incentive to your customers like a discount if they pay in 10 days rather than 30 to 60 days? Do your vendors offer you a discount if you pay your payables quicker in 10 days instead of the normal 30 to 60 days terms? What percentage of your receivables are over 90 days? What percentage of your receivables do you ultimately have to write off? What kind of due diligence do you do when you extend credit to a customer?
Giving a customer terms to pay your invoice is no different than your bank giving you a short term loan. Do you have the owner of the business personally guaranty your receivable? Do you charge a late charge or interest on the past due balance beyond your terms? Is your receivable unsecured or is there underlying collateral that you can file a UCC on as a secured party until your receivable is paid in full?
Your Lending Relationship
Do you have a Line of Credit at your bank? If so, is it adequate to finance the amounts of sales and receivables you generate each month? If not, it is time to sit down and renegotiate your Line of Credit.
If you have no Line of Credit to finance your receivables, then the first priority is to make an appointment with a lender to explore the options to meet your needs. That leads to the question, “Is your financial reporting up to date and in order?”
When seeking a Line of Credit, you need to be prepared before you approach any lender. They want to see up-to-date tax returns on the company, internal Balance Sheet and Income statements since your last tax return. Do you have enough collateral to support your request for the amount you are looking for? How is the owner’s personal credit? Lenders are mainly concerned with your ability to pay them back. Your lender should be looked at as one of your most valuable strategic partners in your business. Without them, it could mean the difference of growing or staying stagnant. It could also mean the difference between staying in business and going out of business.
Your employees are probably your Company’s most valuable asset. Without them, companies will not survive. In order to retain them, they need to be paid timely and incentivized to stay working for you. Unless you are a one person business, this should be your first concern. If cash flow is tight, how long can you pay your employees and not take a paycheck yourself? As the owner, if you loan the company money personally, how long before you run out of money?
Profits do NOT keep a company in business. Cash Flow DOES!!!
This is just the tip of the iceberg in how to achieve positive cash flow for your business.
For more detail or a deeper dive into this area, feel free to contact us at AL Advisory Group for a more comprehensive assessment of your company’s financial health.