How You Can Manage Your Business' Cash Flow Effectively

Cash is the lifeblood of every business no matter whether it's a multi-billion dollar conglomerate or a start-up business. You've just got to have it. Problem is, as recent events surrounding (still a billionaire?) Donald Trump's financial difficulties confirm, even financially savvy individuals are not immune to negative cash flow problems. In today's uncertain economy with fluctuating interest rates, more bank failures and rising prices, no wonder small businesses owners who have limited financial training are having problems staying alive, let alone prospering. In fact, 63% of new businesses don't survive six years. And one of the main reasons for business failure is poor cash management. Too many business owners neglect their cash flow until it is too late to recover. Then, hey presto, they're history!

So, the Big Question is: are you managing your business' cash effectively? If you're not sure, then you probably aren't. One way to find out what you should be doing is to follow the advice of my friend, cash management guru Les Mansonson, president of Monroe, New York-based, Cash Management Resources. He's the author of a superb new book aptly titled Cash, Cash, Cash: The Three Principles Of Business Survival and Success. Les, whose firm offers cash management consulting and training to businesses, gives you step-by-step details on how to manage your company's cash flow more effectively, if you're still a mom-and-pop operation or if you're a covert operative for that shaky billionaire Trump.

Les, who also authors the Cash Management Performance Report newsletter, told me he wrote Cash, Cash, Cash "to help business owners maximize their company's cash flow. That means," he told me sternly, "getting the money from customers sooner, paying bills the last possible moment, concentrating money to a single bank account, managing accounts payable, accounts receivable, and inventory more effectively, and squeezing every penny out of your daily business."

Collect Your Money Faster Okay, we all want to do what Les suggests, so how do we do it? What steps should you take to collect your money faster? According to Masonson, a Certified Cash Manager, you can start with these four steps:

1. Try to speed up customer orders by having customers fax you their orders.
2. Send out your invoices the same day goods are shipped, not a week or two later.
3. Indicate on your invoice when payment is due, and specify the penalty interest for late payment.
4. Consider using a bank lockbox (post office box strategically located near customers to reduce mail time) to collect your mailed checks from customers across the country. Your lockbox bank picks up mail around the clock including weekends, processes the checks and credits your account. Note: lockboxes are particularly valuable for businesses grossing over $25 million annually.

Deposit Your Checks Faster Than A Speeding Bullet

Here are six sure-fire suggestions that Les gives for getting the fastest availability (i.e. use of your money) on deposited checks:

1. Always deposit all checks the same day they are received. Don't hold checks until the next day because you lose one day's float. Key point: you can lose three days of float by not depositing Friday's checks until Monday.
2. Obtain availability of 0 to 2 days on deposited checks. Don't let the bank give you the consumer availability of 1 to 5 days. Be persistent. Ask the bank for its "availability schedule" and scan it to be sure you're receiving fast availability of two days or less.

   Be aware that each bank has its own "availability schedule". This is used to assign check availability to consumers, business (commercial accounts), and large corporate accounts. Availability is the number of days until you can use the money deposited by check as cash. For example, a $1,000 check deposited today and assigned a one-day availability can be withdrawn as cash tomorrow.

3. Don't deposit checks in a bank's Automated Teller Machine or use the Night Depository since you have no evidence that you actually deposited the checks you said you did. Remember, you only receive a receipt that shows the time and dollar amount of the deposit at the ATM, and you get no receipt at the Night Depository.
4. MICR Encode your customers' checks (using a machine that prints magnetic ink on the bottom of the check) with the dollar amount before depositing them in the bank if you deposit over 500 checks a month. Banks charge 3 to 5 cents less for each encoded check. Used encoding machines cost about $1,500. (Check your Yellow Pages under bank equipment for dealers.) Besides saving money, you may get another benefit: faster check availability.
5. Ask your bank its deadline for receiving availability on deposited checks. Some banks may require a deposit of an encoded check by 2 p.m., even though the bank is open to 5 p.m. Make sure you make this deadline, otherwise you lose one day's float.
6. Before using a bank's ATM for check deposits find out the bank's availability deadline. Some banks have a 12 noon cut- off time which means that any checks deposited later are considered to be deposited the next day!

This is a costly mistake according to Masonson. Here are seven of his typically sensible suggestions:

1. Check the financial health of new customers before offering them credit. One way to do so is by using a rating service like Dun & Bradstreet (800-234-3867).
2. Ask a new customer for five business references and call them!
3. Don't offer too generous discounts such as 3% for payment in 10 days. Les suggests that a better rate is 1.5% cash discount. It costs you less.
4. Charge a "late fee" of 2% per month to customers who pay late and charge back customers who take discounts after the discount periods.
5. Follow up on late payers with phone calls and letters. Yes, Les suggests the first letter should go out the very day the amount is even one day late! After 30 days overdue, start implementing this sequence:
   • send out a letter from your attorney
   • turn over the account to a collection agency
   • use a collection attorney.
6. Don't send out new merchandise if bills remain unpaid. Remember that bad debts hurt your bottom line! Be vigilant and try to get at least periodic payments from slow payers.
7. Instruct your bank to automatically deposit "returned checks" (e.g. insufficient funds). Ask your bank if they offer the Return Item Lockbox service. If they do, then use it to redeposit your check and charge back the bank return item fee to your customer.

Disburse Your Money Slowly

To slow down your disbursements consider Les' five suggestions:

1. Pay your invoices on the last day they're due, not before.
2. Try to mail your payment on Thursday or Friday to pick up a few extra days extra mail float over the weekend.
3. Use business credit cards or charge cards for travel, lodging, meals, and small expenses for yourself and your employees. With credit cards, you typically don't have to make payment until 25 days after receiving the statement. Use this float by investing the money. In total, you can typically keep your money invested for 45 days from date of purchase.
4. Don't issue cash advances to employees. Have them use their personal credit cards or business cards, if you provide them.
5. Consider setting up a remote disbursement checking account in another state to extend the check clearing float by at least a day. This practice is used very successfully by 17% of large companies, according to Les. The downside of this practice is that some vendors may complain about their delayed availability on their bank deposit. But this can be overcome by mailing them their checks one day earlier.

When is it best to use a bank's reconcilement service? Les recommends using a bank when: