The Virtual CFO

Happiness is a Positive Cash Flow - Cutting Expenses

I love serving entrepreneurs and their businesses in part because entrepreneurs are optimistic and positive people. Optimism is a great trait to have when you are building a business because it gets you through the ups and downs that are associated with any new business venture.

When the entrepreneur’s company is performing poorly and there is a need to objectively analyze the performance and cash flow of the business, being optimistic and positive makes it difficult for the entrepreneur to make the prudent decision to cut expenses and possibly even employee’s jobs.

I know about this first-hand. Two-and-a-half years after opening my entrepreneurial company, there was a major downturn in the market my firm served. The downturn was caused by Federal government rule changes.

Prior to this, my company had cheated death three times after the start-up phase. Two were the result of losing a large customer and the third was when a large customer went bankrupt. My optimism and positive attitude allowed me to pull my business through the bad times and to motivate my employees to work to turn the company around.

The fourth time I was not so lucky. Two months after the downturn began, it was evident that this was not a temporary situation. I remember sitting down and running a cash flow analysis one Friday evening after all the employees had left for the day. The analysis showed that my company was about to face a major cash crisis.

At no time did I consider letting employees go or cutting expenses. I had willed my company to succeed before and I was sure I could do it again. I was also very loyal to the employees who had helped me build a successful business.

In the end, this decision cost me a lot of money and my business failed.

If I had it to do all over again, I would have cut employees and expenses to match the expected cash flow immediately after analyzing the cash flow that Friday evening.

I learned the hard way that it is better to cut expenses and payroll when there are cash flow problems in order to save a company and the remaining employees’ jobs.

Happiness is a Positive Cash Flow – Strategies to Improve Cash Flow

Here are some strategies that can help improve your firm’s cash flow:

• Analyze the cash flow, prepare a budget, and then synchronize cash inflows with cash outflows.
• Include capital expenditure (major physical asset acquisitions such as equipment and buildings) and their associated periodic payments, insurance, and maintenance costs in the budget.
• Implement credit policies that weed out customers who will either pay slow or who may not pay at all.
• Make routine collections calls (i.e., the squeaky wheel often gets the grease).
• Take advantage of vendor discounts.
• Maintain as small an inventory as possible.
• Slow down your firm’s payments to vendors (within reason).

Happiness is a Positive Cash Flow– Prioritizing Payments

Here is the way I generally prioritize payments when cash flow is tight or negative:

1. Payroll (I usually hold two to three weeks of estimated payroll in reserve when budgeting for a negative cash flow – employees generally don’t keep working when you don’t pay them).
2. Taxes - payroll, sales and use, business, personal property, etc. (You will pay late charges and a hefty fine for not paying these on time. You could also face criminal charges if you knowingly fail to pay tax obligations.)
3. Rent, utilities, phone, data lines (i.e., the things that keep the company open for business)
4. Equipment rent and notes, bank notes, mortgages, and other items that have been financed (Late payments to finance companies are usually reported to credit reporting agencies such as Dun & Bradstreet and TRW.)
5. Vendors from whom you’ll need services in the near future.
6. All others

Happiness is a Positive Cash Flow – Managing Your Cash Flow

It would be safe to say that every small business experiences cash flow problems from time-to-time.

You can mitigate cash flow problems by actively budgeting for and managing your cash flow.

On a regular basis, you need to estimate the cash you expect to receive from customers, identify the payments that are due (payroll, taxes, vendor payments, etc.), and then create an analysis that compares the estimated cash inflows to the payments that are due. From this analysis you create a cash flow budget.

The cash flow budget will provide a guide for you to use to manage your company’s cash flow.

If the analysis shows that a positive cash flow is expected, you can budget to pay all of your obligations on time and take comfort that there will be funds available to do this.

If the analysis yields a negative cash flow, you will need to prioritize your payments in the cash flow budget in order to conserve your liquid funds.