Ensuring Cash Reserves Are In Place

It feels as if, at the same time last year, we had more saved up in the money market account. And I know that last year the line of credit was paid off, while this year we’ve got quite a bit outstanding. Should I panic, or keep going forward?

Thoughts of the Day: There are several reasons that you could be dipping into cash reserves and the credit line. Set in motion a plan to get things back on track. Treat underlying problems as warning signs and fix them permanently.

This can be a good news / bad news question. Figuring out which can make all the difference in how the year unfolds for your business. Look for facts to validate or correct what you’re feeling. Instincts can be useful but need to be backed up with accurate information.

Check on factors that impact cash reserves: accounts receivable, accounts payable, credit card & other loan balances, checking account balance, pending orders, to name just a few. How are each of those accounts compared to last year? If accounts receivable is up that may be where the cash went – waiting on clients to pay invoices. If credit cards, loans or accounts payable are down, you are probably paying off bills and principal faster than the year before. If pending orders are up, you may have a classic problem of cash flow drying up as the business ramps up.

If accounts receivable is up, check on why – how much is in current, 30-, 60-, 90-, and over 90 days past due. Reduce outstanding balances over 60 days past due. Getting paid get riskier, the further out the outstanding balances are from the time the client received their goods. Change your payment policy to time of delivery. Check the credit worthiness of all clients who receive credit. Make clients shift to credit card payments, to put the risk on the credit card company. Clients that are over 30 days past due, insist on speaking with the person in charge of releasing payments and verify that the outstanding balance is on their books, approved, and get a pending date of payment.

If business activity is up, you may need to talk to your bank about increasing the size of your credit line. You need a plan to cover the “cash stretch” period from the time you start ramping up to service additional client activity, until the time clients make payments. Look at your exposure from additional hiring, equipment and material purchases to the time cash flows in from new client orders. Calculate the amount you’ll have to float. Ask clients for deposits on new orders to lower your risk and cash outlay.

If credit card balances are down, but cash is tight, you may be paying off the credit cards too quickly. Same goes for a drop in a credit line or term loans outstanding. On the other hand, if credit card balances are up or more of the credit line is used up or you have more outstanding term loans and cash is tight, this is a warning that things may not be going well in the core business.

Check on profitability and breakeven. Find out if you are making enough in gross profit to cover overhead and principal payments with money left over to contribute to savings. Make sure that any profitability problem gets addressed immediately, as an unprofitable business is not sustainable. Dump unprofitable accounts, scale back on overhead and find ways to improve productivity.

Looking for a good book? “Financial Modeling for Business Owners and Entrepreneurs: Developing Excel Models to Raise Capital, Increase Cash Flow, Improve Operations, Plan Projects, and Make Decisions” by Tom Sawyer.

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