Up Your Business LLC

Key to your business’ success is your cash flow management philosophy or mindset.  Cash is essential for achieving the profit potential of your business.  A dollar held in the form of accounts receivable or inventory cannot be reinvested profitably until you convert it back into cash. Receivable and inventory are necessary parts of the cash flow cycle, but cash makes the cycle revolve. Your cash flow management effort should seek the most rapid conversion into cash of your receivables and inventory. It is important to know and apply the fact that neither a rising sales volume nor a profitable operation spontaneously produces a positive cash flow.

What do you use to help manage your business?  What tools, from a financial point of view, besides your bank account, do you use to help make daily, weekly, monthly and annual decisions affecting the growth and viability of your business?

Many would say financial statements (balance sheet and income statement). How often do you have financial statements prepared? Do you receive them frequently enough so the material is relevant to helping you make business decisions now? What in the financial statements do you look at or use to guide you? Does your CPA, accountant, bookkeeper or internal accounting system give you a cash flow statement with the balance sheet and income statement?

Financial statements provide great value, if used properly. The primary fact about financial statements is they are backward looking. When driving your car, do you look through the rear view mirror the bulk of the time while trying to go forward? Certainly not!  You look through the front windshield in order to drive forward. What tool do you have in your financial tool box to give you the ability to see down the road a good distance?

The tool to be used consistently – is cash flow projections!  This tool is the only one to give you the forward visibility you need to know what is happening with your cash flow.

The foundational principle to your business is, after the fact that God is the real owner and you are just a steward of the business, CASH IS KING. If cash runs out everything you’re working for is down the toilet. If the business is important – then CASH has got to be important.

Over the years I would ask business owners, “How do you use or why do you get financial statements and cash flow projections.” They would always answer, “To give to my banker/lender.”  I hope that would not be your answer! With this article I hope to help you form a new mindset or philosophy about cash flow projections and their value to you as a business owner.

If I were to ask you the question, “What is your cash balance now?” Could you give me an answer?  Or how about if I were to ask, “What will your cash balance be six months from now?” The key to answering both of these extremely important questions is: do you have the mechanism, things, tools, systems, processes in place to give yourself the answers?

What do I mean by that? First, are you keeping the books current and accurate? Second, do you have cash flow projections that go out at least six months and are you adjusting them monthly by adding in actual numbers to the template and keeping a rolling projection, adjusting for what has just happened in your business, industry, local and national economy?

These forward-rolling, monthly-adjusted cash flow projections allow you the best visibility you can possibly have for your business. They allow you to act rather than react to factors and opportunities in your business.

What do you have or use to head off potential disasters in your business? What do you have or use to adequately gauge if you have the cash flow or wherewithal to take advantage of potential opportunities?

Cash flow projections are like an early warning system for your business. The US government spends billions annually on early warning systems of varying kinds – to protect citizens’ borders, electrical power, water supplies, airways, and waterways, to name a few. What early warning system for cash flow – your most vital asset of your business – do you have and use consistently?

In your business, there are vital signs that must be monitored daily – the primary one being cash flow. Look at cash flow projections that are updated and adjusted monthly and viewed almost daily as taking the heart rate and blood pressure of your business. Physically checking someone’s heart rate and blood pressure will give much different and more accurate information than just asking them if they are okay or how are they doing.

I hope you will join me for Part 3 of this series on:  What is the most important asset in your business?

May your Cash Flow!

Many business owners would respond with answers such as customers, our service, products, employees or stakeholders. These are all very important but what is it in your business that is like blood to the human body?  What is the asset, just like your blood, that once it is gone, so is the business life?

The most vital and important asset in your business is CASH FLOW.  My experience working with thousands of business owners for almost four decades is when the term cash flow is mentioned, like that of other ‘financial terms,’ many business owners turn or point to their accountant, CPA or bookkeeper as the one responsible and not themselves.

Working with and relying upon your accountant/CPA/bookkeeper is an asset; leaning too hard on one can be a flaw. Business owners have a tendency to rely heavily on their financial aids when it comes to tracking their company’s critical numbers.  As the owner of your business, you cannot afford to abdicate the responsibility for the financial health (cash flow) of your company to others, even though they have the education and training that is required to monitor the health and you might not.  As the owner, the most important asset in the company – cash flow – rests ultimately with you and you alone. If you’re someone who is a bit intimidated by accounting and all the jargon that goes with it, you are not alone. Stay with me.

The simple truth is that you don’t need an accounting degree, MBA or an in-depth understanding of double-entry accounting to know and understand cash flow and how this knowledge affects the health and risk management (intelligence) of your business and deserves your keen attention. I want to help you get over your fears, lack of knowledge and misunderstandings about cash flow.

As we get started, let’s do a review of the basic financial documents that track the flow of money within your company. Most critical numbers live on these documents.

Balance Sheet: This is a cumulative document that lists your company’s assets and liabilities, among other numbers, from the time your started your business. Reviewing your balance sheet gives you a quick handle on the financial strength and capabilities of your business.

Income Statement: Also known as the profit and loss statement, or P&L, or statement of operations, this document lists your company’s income (revenues or sales), minus your company’s expenses, and it shows you the profit or loss over a specific period of time.

Cash Flow Statement: A cash flow statement helps you stay on top of how much money came and went through the business for any period of time. This document is critical because it helps you understand why, even if your company appears to be turning a profit, you don’t have much money in the bank. It points out the sum total or result of all the decisions you and your team made in the business for the time period of the statement.

For this discussion it is important to understand the term net income or net profit, also referred to as net earnings, current earnings or the bottom line. This number is critical in that it reveals how much money is left after accounting for business operations.  The key word to recognize and acknowledge is accounting. There is a difference between net income and cash flow and business owners need to know, understand and be able to apply the differences in their decision making.

Net income is really an accounting term while cash flow is a very practical, common sense, where-the-rubber-hits-the-road business term. The key difference between profit and cash flow for business owners to know, understand, recognize and apply to their decision making is timing differences.  Based on generally accepted accounting principles (GAAP), profit does not factor into timing differences.

What do I mean by timing differences and why are they important to a business owner and the running and managing of their business?  Timing differences occur when you record income or an expense in accounting terms and when you actually receive or pay out cash. The key to running and managing your business (what keeps your business alive – like blood in your body) is CASH.

I hope I have wet your appetite for more, but you’ll have to wait for part two or contact me.  In the meantime, feast on the benefits to you and your business of establishing the habit and discipline of cash flow management via projections :

• Gives you forward visibility
• Gives you the ability to act rather than react to circumstances that you encounter
• Daily use and review provides the vital signs of health of your business rather than just assuming it is healthy
• Gives you greater insights into your business you might not have known or seen
• Provides an early warning system for potential problems
• Increases profitability
• Reduces the stress of managing the day to day affairs of your business
• Gives you greater control, confidence and therefore peace of mind
• You know the true cash position of your business at all times
• Gives you the opportunity to concentrate on other areas
• Reduces the chance of failure
• Enhance the perception lenders will have of you
• Improves your return on investment (ROI)
• Frees you to be alert for opportunities to expand
• Creates greater value and increases wealth of your business

May your Cash Flow!

Though many say business credit and financing is loosening up, many borrowers still are having a tough time getting money, especially to refinance existing debt or aid cash flow, rather than expanding their business.

A lot of reports are stating business borrowing has been helped by a current, short-term government stimulus program through the U.S. Small Business Administration. The program bumped up the government’s guaranteed backing on qualified bank loans to 90% and eliminated some borrower fees.

Even with it, banks are very reluctant to go out on that limb and extend business credit and thus the business loan recovery has a long way to go.

It is still difficult for small businesses and startups to get financing.  Some banks have re-opened the loan vault, however with more stringent requirements being placed on business loan proposals.  Many banks are still reeling from their own losses and upside down balance sheets resulting from lax credit standards over the past five to ten years and/or adverse economic conditions in their local economy affecting businesses negatively. Many businesses, because of this economy are no longer “bankable” – able to qualify for a loan.

Times Have Changed!

There is a new “basic or normal” in business credit and financing now. Some of the new “basics and norms” are:

• Reduced amount of leverage (debt of the company in relation to equity)
• Larger down payments on financing or refinancing the purchase of assets (25% – 35%)
• Increased loan to value ratios on pledged collateral (25%-40%)
• Adherence by lenders of debt coverage ratios (1.30 to 1.0 times)

What to Do?

• Visit with or engage a professional to help you evaluate your loan request need and determine if it is viable or to help make it viable
• Shop or visit with several lenders (3 to 5) to determine if your proposal might fit with the lenders’ appetite for your type of business and need. Determine what each lender’s terms and conditions might be if they were to make a loan to meet your needs and if these terms and conditions would be acceptable to you.
• Be prepared to seek advice, learn, change mindsets, plan, be persistent, be flexible, work with your strengths and understand the cost-benefit of letting those who are experienced in dealing with lenders and loan proposals work for you.
• Look to develop and maintain a relationship with the lender

Here is a true story of how an established business owner approached his lender hoping to do business as usual.  Running head on into the lending climate mentioned above he sought my expert advice and coaching, and changed his mind about his role in maintaining a positive relationship with his lender. For the Life of your Business.