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Get more cash

Avoiding a Cash Flow Crisis

Maximizing profits and growth while also maintaining adequate cash flow is one of the most difficult challenges a young business faces, but it’s also one of the most important.
The old adage that “cash is king” has never been truer given today’s challenges for securing a funds or attracting investors.

To utilize capital to spur growth and avoid a cash flow crisis consider the following guidelines:

Prioritize cash flow

Determine how much cash your company should have on hand at all times. (A general rule of thumb: shoot for at least enough to cover operating expenses for three to six months.) Then make it a top priority to meet that goal week after week. Without cash, even a rapidly growing company won’t last long.

Invest

If you have more than enough cash-on-hand, consider using excess capital to grow your business. Fail to invest in capacity and you risk failing to meet growing demand. On the other hand, overestimate demand, invest too much capital or invest it poorly and you could kill your business entirely.

Spend wisely

It’s easy to rationalize spending money on infrastructure, equipment or new hires that will make doing business easier or more convenient, but if it won’t directly lead to more or new revenue flow, it’s probably too risky. Look at it this way: small and new businesses can usually only afford to spend on projects that will bring in more money than they cost. You don’t want to spend $100 to make $50.

Plan for accounts receivable growth

If you’re anticipating growth, be sure your billing department is prepared. As the number of clients increases, it becomes harder to keep close track of each account; without oversight, an increasing percentage of clients may become delinquent on payments. When this happens, cash flow can slow to a trickle even if business is good and sales are up. You might be surprised to learn some up-and-coming companies are profitable right until they file for bankruptcy, thanks to such accounts receivable problems.

Collect

Closely monitor which customers have outstanding debts, and develop a working plan of action for pursuing delinquent accounts. You don’t want to lose clients by being inappropriately aggressive. On the other hand, without payment you could lose your business. If your company consistently has problems collecting payments, consider changing your billing structure. That might mean requiring new clients to pay some money upfront, integrating a retainer or subscription fee or making payments due sooner after delivery.

Keep track

Consider implementing a financial dashboard system to assess your business’ cash flow on a weekly basis, and use what you learn to inform spending decisions. For example, if the amount of cash-on-hand is shrinking, examine the numbers to find out why. Are you spending too much on incidental costs? Are clients consistently late making payments? You can’t fix the problem until you identify it, and you can’t accurately identify it without data.

Even if your business is thriving, you still need to keep a watchful eye on cash flow. Fast-growing companies get into trouble when cash-on-hand dwindles, sometimes going from profitable businesses to bankrupt ones overnight. (For real world examples, check out these interesting case studies that recently appeared in Inc. Magazine.) Make cash a priority, and you can grow your business without going out of business.

Robyn Barrett is founder and managing member of FSW Funding, specializing in factor financing for small to mid-size companies. For more information, visit www.fswfunding.com.

Economic concepts

Managing Deductions: Steps to increase revenue

Unfortunately, it is common for customers to pay less than they owe, taking deductions off their bills or underpaying their invoices. For small businesses, this can create a significant loss in revenue and problems with cash flow. Some businesses have reported losing as much as 10 percent of their gross sales to deductions. Fortunately, companies can take steps to address and resolve these issues.

Reasons for deductions

Customer deductions can point to systemic issues such as quality control or a lack of communication between departments. Other organizational problems that may contribute to customer deductions include: poor relationships with trading partners, incorrect invoicing, shipping irregularities, problems with order fulfillment or inadequate order processing methods.

Some companies automatically write off deductions under a predetermined amount. However, savvy customers sometimes catch on and deduct amounts slightly below that threshold. Others take discounts on terms like two percent 10 net 30 even when they are paying bills monthly.

Large retailers are implementing more stringent compliance standards, leading to more deductions. For example, Wal-Mart introduced its Must Arrive by Date program in 2010. Suppliers who fail to deliver goods to Wal-Mart within a four-day window more than 90 percent of the time during a month are automatically docked 3 percent of the cost of goods sold. Since Wal-Mart is a leader in the retail industry, other companies are likely to follow a similar policy.

Deductions can be divided into three categories:

• Intentional deductions are sales-related and include advertising, markdown allowances, and special promotions. These deductions are considered the “cost of doing business” and are usually legitimate, so opportunities for recovering money are limited.
• Preventable deductions are frequently associated with compliance issues, such as shipping too early, too late or using the wrong carrier. These are easy deductions to address. A quick investigation can pinpoint where operations are failing, and correct the issue.
• Unauthorized deductions occur when customers short-pay their invoices because of pricing, returns, or full and concealed carton shortages. These are also deductions which can be prevented when proper oversight is in place.

Solutions to reduce deductions

Once business owners review current practices they can create best practice guidelines and invite team members to be part of the solution. Order fulfillment steps can include:
• Establishing checks and balances to ensure correct quantities, prices and sizes
• Inspecting products and cartons before shipping
• Reviewing customer’s compliance requirements to make sure all shipping, packing and labeling requirements are met
• Examining invoices to ensure documents contain correct purchase orders, invoice numbers and clearly defined payment terms
• Automating the accounts receivable process to better identify, document, track and resolve deductions

Deductions can be the result of any number of errors in a company’s process. Conducting a root cause analysis to reveal why customers are taking deductions can help determine appropriate recovery efforts and thresholds for automatic write-offs. Until the right tools and solutions are implemented, company revenue and cash flow will be in jeopardy.

Robyn Barrett is founder and managing member of FSW Funding, specializing in factor financing for small to mid-size companies. For more information, visit www.fswfunding.com.

Coldwell Banker

How to establish trust with your bank

According to a recent survey, financial services and banks were noted as the least-trusted industries in 2012.  Despite the fact that the financial crisis occurred five years ago, people are still concerned about the reliability of banks.

The 2012 Edelman Trust Barometer had more than 30,000 online respondents, in which only 46% of U.S. respondents said they trusted the financial services industry, and only 41% said they trusted banks. Clearly, the last few years tainted the banking industry’s image, and it is taking time for public perception to change.

Despite what the public may think due to the history with the bank crisis and the bad press, banks are not inherently sneaky or dishonest. But like any business, it comes down to building relationships.

To establish trust with your bank, there are a few precautions you can take that will help to set the foundation for a strong relationship.

Don’t put all your eggs in one basket

When you are establishing your business, don’t have all your banking relationships at one bank. For example, many bank documents will cross collateralize loans and bank accounts – both personal and business. Set up your operating business account at one bank and payroll at another. It is also a good idea to open personal accounts and loans at a completely different bank than your business.

Grow the relationship

While it is vital to have a great relationship with your primary banker, you need to move beyond that relationship in the bank. Bankers are transient and move positions within the bank or to another bank quite often. If you only build a relationship with your banker and your banker is promoted or leaves the bank, you will be left with no allies. Get to know your banker’s boss and associates. You never know who will be your banker tomorrow.

Know your bank

The relationship you are trying to establish is really with the bank, so take the time to learn about the banks you do business with. Understand the services they offer. Search the Internet to read blogs and reviews from happy and unhappy business customers. This will help you better understand if this bank is a good fit for you.

Sources and uses of cash

When you talk to a banker about the best loan for your company make sure the banker understands what the money will be used for. Don’t assume the banker knows. For example, if you need money to fund payroll and pay vendors, you need a working capital loan. A working capital loan is based on short-term assets (accounts receivable and inventory) and is used to finance short-term liabilities (payroll, accounts payable).  Don’t let a banker talk you into an SBA term loan to finance working capital. Match assets and liabilities – short term loans fund short-term liabilities and long term loans fund equipment and real estate.

Read the loan documents

So many smart business people are more concerned with the terms on their cell phone contract, but never bother to read or understand the details on a commercial bank loan. While most bank loan documents are standard and the bank may not make any changes, a business owner should still have an attorney review all the documents. The attorney’s role would be to advise you on what is in the documents – what are events of default?  What are cure periods? What should the business owner make sure they do in terms of financial reporting, notice of management or ownership change?  If you understand your loan documents, you will be better protected against surprises.

The public’s perception of the banking industry is clearly still hindered by the scandals, government accusations and lawsuits brought on by the financial crisis. Fortunately, the reality of the situation is better than it is perceived.

Regardless of the industry’s image, it is always best for business owners to take a proactive approach. Taking the time to get to know your bank is the key to building a long term successful relationship; one that you can feel confident in, where you can trust your financial service provider.

 

Robyn Barrett is founder and managing member of FSW Funding, formerly Factors Southwest LLC, specializing in factor financing for small to mid-size companies. For more information visit: www.fswfunding.com

 

financial statements

What Your Financial Statements Can Tell You About Your Company

You don’t have to be a CPA or rocket scientist to decipher the information on financial statements. If you have been intimidated or reluctant to take the time to learn to read your company’s financial statements, now is a great time to learn.

Below are a few quick and easy steps to untangle the web of financial reports like income statements, balance sheets and cash flow statements.

Income statement

Income statements can be used to make key decisions, such as whether to extend credit to new accounts; increase or decrease an existing line of credit; offer certain terms or discounts; and, most importantly, whether a company will get paid.

The income statement records a company’s performance over a set period of time and starts with net operating income, sales or revenue, and ends with the net income. The net income is what the company earns after deducting expenses like the cost of goods sold, overhead and interest.

Key metrics to look at on the income statement include the interest coverage ratio and gross profit margin. The interest coverage ratio or times-interest-earned ratio lets you know if the company has enough money to cover the cost of its debt. The gross profit margin shows the company’s relationship between revenue and the cost of goods sold. You can use the percentages to gauge whether a company is incurring insufficient volume or excessive purchasing or labor costs.

You want both the interest coverage ratio and the gross profit margin to be high so that your company is not carrying too much debt and there is enough money to pay expenses.

Balance sheet

A balance sheet captures a company’s financial position at a specific point in time. This shows the company’s total assets such as cash, short-term investments, inventories and equipment; total liabilities like accounts and notes payable; and shareholders’ or owners’ equity. The quick ratio and the debt-to-equity ratio are important to note in the balance sheet.

Quick ratios are considered to be a more conservative measurement than the current assets ratio because inventories are excluded. Inventories are “less liquid” than cash, and if a company needed to sell its inventories to pay debt, it could be difficult to arrange a quick sale.

A high debt-to-equity ratio could indicate a company has aggressively financed its growth with debt. On the up side, if the borrowed money assisted with increased or improved operations, the company might generate more earnings.

Each industry is different, and it is essential to compare to its peers. Some industries have low gross margins which could be considered bad, but if it is an industry norm and the fixed costs are low, it should be less of a concern.

Cash flow statement

Cash flow statements tell where a company is getting cash and how they are using it. Cash flow statements are divided into three sections: operating, investing and financing activities. Some key information contained in cash flow statements comes from income statements and balance sheets.

Operating activities — cash and non-cash

The first line item is consolidated net income. You can add certain line items like depreciation and non-cash transactions to net income and subtract other items, such as deferred income taxes, to calculate how much cash a company has generated during a specific time period.

Investing activities — inflows or deposits

A cash flow statement’s investing activities section details a company’s property, plant and equipment purchases, sales of short-term investments, or the acquisition of a business during a specific time period.

Financing activities — outflows or payments

Understanding significant changes in a company’s cash flow can help you make informed decisions. You want to know whether your company’s cash is increasing or decreasing. Gains may signal an organization financed its debt and investments and had more money remaining than in the prior period. Similarly, if a company’s cash flow is decreasing, the organization may experience future cash flow management problems.

While you may still need to hire a professional to help you maintain your financial statements and documents, it is always good to have a general understanding of what each financial statement is used for. As a business owner, it is important to know the financial trends to determine if the numbers are increasing, declining or staying flat. Then you can be proactive and steer you company in the correct financial direction.

For more information about financial statements and/or FSW Funding, fswfunding.com.

Factoring Programs

Factoring Programs: Good News For Young Entrepreneurs

The lecture hall was packed, but students weren’t listening to a lecture; they were listening to what could possibly be their only chance at entrepreneurship: factoring programs.

It’s an old — and often misunderstood — strategy for young entrepreneurs whose capital and credit history aren’t as appealing to banks as they should be in order to qualify for loans.

Factoring programs allow for the advancement of funds for small businesses, such as those started by students, against an approved commercial invoice. The remainder is then given to the client once is the invoice is paid. These funds then assist small businesses by allowing them to raise capital, provide credit, etc.

For many students, factoring programs are the only options they have in financing their entrepreneurial projects.

In an interview after the lecture on factoring programs held on the Arizona State University campus, Robyn Barrett of FSW Funding, formerly Factors Southwest LLC, explained the interest of these young entrepreneurs in advancing their ideas and ambitions in the business world. “It’s great to work with people that are so passionate about their job, work and their company,” she said.

One of FSW Funding’s success stories involves a young man who came up with the idea of combining engineering and art to craft a product that he believes makes a difference: Refresh Glass. Refresh Glass products are entirely made from recycled glass. Thanks to factoring programs, Refresh Glass is now a growing business.

Robyn Barrett also says, however, that students must be prepared to take on these entrepreneurial projects, whether they are using factoring programs or not. Students must equip themselves with basic accounting principles. Barrett says that many entrepreneurial students lack these basic skills essential to their entrepreneurial success.

And so as student entrepreneurs walk through their graduation ceremony and their future awaits, they can now be more hopeful. Factoring programs may be an old and misunderstood strategy for financing, but it’s one they may be able to count on.

For more information on factoring programs provided by FSW Funding, formerly Factors Southwest LLC, visit factors-southwest.com.