Ask the experts

Success comes from good cash flow management

vbridges@newsobserver.comFebruary 4, 2013 

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If small business owners don’t manage money well, they risk not being able to pay their employees or rent, and could ultimately go out of business. Shop Talk reporter Virginia Bridges spoke with Mary Moore M. Ritchie, a SCORE counselor and former owner of Court Reporting Services, about the importance of cash flow management. Here are Ritchie’s edited comments.

Small business owners should use cash-flow projections to predict cash positions and decide how to generate more cash before it’s needed.

Cash flow can come from receivables, credit lines, short-term bank loans, loans from friends or family secured with a promissory note, collections and pushing accounts payable out as far as possible. Excess cash indicates how well cash flow is being managed.

Control and manage cash flow by keeping inventory to a minimum, speeding up collections from customers and having a close relationship with a commercial lending officer.

Many people confuse cash with profits. Cash is money in the bank. Profits are the bottom line on profit and loss statements after all payments have posted during a certain time period.

To avoid a cash drought, businesses should map out cash flow for a minimum of six months, and one year for startups. The process for existing business owners includes anticipating revenues and expenses over the next six months to ensure enough cash will be available to cover upcoming expenses.

Business owners should calculate expenses and amount of monthly surplus needed. Then determine the amount of income needed to make those numbers work.

Use cash-flow projections and cash positions to develop collection practices and be aware of customers’ payment histories. Also, practicing good cash flow management allows owners to identify their most-valued customers and target them through marketing. Small business owners should deposit monthly cash surplus into a sweep account, which is a business savings account. Withdrawals from this account should be treated as a loan to the business with a plan for repayment.

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