Articles Tagged ‘Cash flow’

Are You A Slave To Revenue?

Wednesday, April 30th, 2014

Joe has a successful business, revenue continues to grow and he is hiring more people. But the truth is Joe is highly frustrated; he is doing more work but having to chase dollars to keep the operation funded. So he focuses more effort on generating more revenue in hopes that this cash cycle (and the frustration) will lessen. Will the frustration go away with more revenue? How would you advise Joe?

We have been conditioned by our society and encouraged by bragging rights that revenue growth is the most important thing in owning a business. But revenue growth by itself is an illusion and won’t get you the results you truly want. Profit is the key ingredient in business success but it is hard to find out why that is true.

Have you spoken recently with someone who has openly talked about their business profitability? Probably not another business owner or friend; you might with your accountant but what kind of reaction do you get there? Tax consequences, and we surely don’t want that! Every way we turn, there is little emphasis on being consistently profitable in our business. Profit is nearly a six letter obscenity and synonymous with greed, if you believe what you hear.

Here are some beliefs that will help you understand why profit is more powerful than revenue and so important to a business:

●Profit increases cash in the business – profitable businesses will grow their cash position if they are not using that money to reduce debt. So if you want to have more working capital – cash available for about anything – profit will create it.
●Profit increases equity in the business – profitability (flowing into retained earnings) is the primary ingredient that increases equity in a business. The amount of equity directly impacts leverage and this impacts how fast revenue can grow.
●Profits provide more money for the shareholders – When a company is profitable, dividends can be paid to those who have invested in the business.
●Profit increases the ability of the company to borrow. Debt to worth is one of the key elements lenders look at to determine if they will grant more debt. If your company has three dollars in debt for every dollar in equity, borrowing more money is probably not a viable option. Profit is the key to leverage control.
●Profit funds growth – growing revenue creates growth in accounts receivable, inventory and other assets. If one side of the balance sheet grows, the other side has to keep up and that only happens with increases in liabilities and equity. Businesses that are not profitable will have limits on revenue growth.
●Profit pays down debt. Profitable companies will pay down debt much faster than those businesses that are just getting by. Profit turns into cash, which can be used to reduce or pay off debt.
●Profit provides opportunities for employees. It is very difficult to pay good wages and bonuses when there isn’t enough money to keep the creditors and lenders happy. Profitable companies continue to hire great people because they can afford to and that perpetuates itself.
●Profit provides stability – business owners are much more productive when focused on money-making opportunities and not chasing the next dollar to pay a vendor or make payroll. Profit affords a cash cushion that provides that stability.
●Profit provides peace of mind – who has the most piece of mind, the business owner with $100,000 in the bank and no borrowings, or the one with no money in the bank and $100,000 in borrowings?

Dan Lacy
Growth & Profit Coach, Financial Strategist, Cash Flow Doctor, CEO Mentor
dan@dynastybuilder.com
phone: 765-644-8887

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Six Ways to Speed Up the Flow of Cash

Thursday, November 7th, 2013

Protecting your company’s cash position and insuring that you have adequate cash flow in future months is critical in our current business climate. The US economy is flat at best, political leadership is anti-business (just look at the tax rates kicking in January 1), the banks are wary of any business without a AAA credit rating, and climbing health care costs are still an issue. If there was ever a time to be “cash flow” diligent, it is today.

What do you do? Here are 6 proven techniques you can use for immediate cash flow improvement:

Profitability – Typically we don’t correlate profit with cash flow, although they are directly tied together. Businesses that are losing money will have more cash flow problems than business that are making money. As we get close to the end of the year, don’t let your accountant talk you into spending a bunch of money to lower your tax liability; sometimes it pays to pay a little in taxes to protect your cash flow and your equity position in your company. If you are making money, your chances of maintaining a positive cash position are very good.

Revenue – This is the first step in cash flow; without a sale, there is no cash to flow. Growing revenue is a positive contribution to cash flow so keep your sales people more accountable on hitting monthly sales targets. Develop a monthly revenue forecast. This can be done by department, geographic area, product line or for each sales person by customer. Be realistic in your forecast, based on historic trends – will your forecast be conservative, moderate or optimistic? Measure each sales person’s performance monthly in a sales meeting. If you need to, take the next step and start measuring behaviors of each of your sales people with call reports (some will already have a pipeline report in their CRM) but look at contacts, presentations, closes and dollars sold per month.

Accounts Receivable – You can improve your collections with these steps:
●Review your A/R report weekly.
●Review each account that is over 45 days old – what is being done? Are promises being made? Get informed on who is paying slowly.
●Get out in the market and talk to your slower customers – see what is going on. You would not believe what impact a “presidential” sales call has on revenue growth. I once encouraged a business owner to call on a slow client and he was appalled at what he learned, but he was 90 days too late.
●Invoice weekly instead of monthly.
●Fax or email each invoice – don’t rely on snail mail.
●On slow accounts, consistency is the key
●Get a good collection agency working for you. I recommend Al Holdren at Atlas Collections in Muncie 765-751-3210.

Inventory – less is better. Inventory is not cash and the less you have of it the better you are from a cash flow standpoint. Work out a plan with your supplier to see if they can deliver more often, convert your old inventory to cash, and measure your current inventory level against your current revenue level – you probably have too much inventory on hand. This is typically the place where dead money sits but few business owners realize it.

Borrowing – make sure you have maximized this resource. If you can restructure or refinance some existing long term assets at today’s low rates, you should jump on it. Although credit is harder to obtain, there are still lenders out there looking to lend money. Exhaust this ability by putting together a good business plan with your company’s last two year’s performance and start looking. If you noticed, many large companies are going to the bond market and building large cash resources at very low costs. We have been very successful in helping business restructure debt, lower interest costs and lower payments to really improve cash flow.

Accounts Payable – more is better. Although suppliers are also tightening up on credit policies, you can normally leverage this relationship for longer terms on repayment. If you are in trouble with your suppliers already, talk to them and show them your plan to repay and how they are going to make more money in your account by selling you more product. But don’t make any promises you cannot keep on repayment because that will hurt you in the long run.

A little bit of focus on these key areas will improve your cash flow dramatically.

Dan Lacy
Growth & Profit Coach, Financial Strategist, Cash Flow Doctor, CEO Mentor
dan@dynastybuilder.com
phone: 765-644-8887

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Small Business Lending and Banking: Current Trends

Friday, January 21st, 2011

The following is a summary of the presentation made by Brad Bush from Riddell National Bank to the First Thursday Business Group (1/6/11) in Terre Haute (IN) on the topic of Small Business Lending and Banking:

• Contrary to popular and media belief, there is still money available to lend. Many banks are eager to loan money to qualified applicants. However, the credit analysis has become more stringent and certain industries are being analyzed with increased caution. Those industries include but are not limited to construction, real estate, and automobile dealerships/floor planning.
• Business loans are available for a variety of purposes including but not limited to equipment purchasing, real estate purchase and refinance, and lines of credit.
• Commercial lines of credit are a viable source for temporary financing but are not intended to be permanent solution to any borrowing need. Commercial lines of credit also must be paid to a zero balance at some point during the 12 month term of the line. They can be secured with real estate, equipment, accounts receivable, or a combination of any of the three.
• Commercial real estate loans can be extended to a customer so long as the loan amount does not exceed 85% of the appraised value of the real estate.
• Small Business Administration (SBA) loans are available to qualified borrowers. An SBA loan is a partnership between the bank and the Small Business Administration. All payments and questions are directed straight to the bank representative.
• Cash flow is the predominant factor in analyzing a commercial loan request. In years past, collateral was the predominant factor. In today’s market, banks must have adequate cash flow regardless of the value of the collateral. An acceptable cash flow ratio is 1.20. This ratio, called Debt Service Coverage, means that for every dollar of debt, $1.20 must be earned to repay that debt.
• Fees of a commercial loan vary based on the collateral and the loan amount.
• To get started with a commercial loan, a business owner needs to gather three years of business and personal tax returns, a personal financial statement, a profit and loss statement for the current year of business, and a business plan.
• Business planning is imperative. A moderately successful entrepreneur will become a very successful business owner with the creation and execution of a detailed business plan with three to five year income and expense projects. The Indiana Small Business Development Center on the campus of Indiana State University is able to help with such an endeavor.

Bradley A. Bush

Business Development Officer

Riddell National Bank

2129 S. State Road 46

Terre Haute, IN 47803

Ph. (812) 877-4635

Fax (812) 877-4621

Cell (812) 249-1719

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