There's something you can never afford
to forget when you are running a
business out of your home -- cash is king!
Whether it is a multi-billion dollar
empire, such as Bill Gates' Microsoft,
or the tiny mom-and-pop convenience
store on the street corner, cash is the
life blood of the business.
In today's uncertain economy with ever
rising interest rates, many small
businesses with limited financial
training are having problems staying
alive, let alone prospering. In fact, 63% of new businesses don't survive
six years -- and most work-at-home
people fail within 6 months!
The primary reason is bad cash
management. To many self-employed people
neglect their cash flow until it is too
late to recover. Suddenly, presto!
it 's back to your office job! We don't want that to happen.
So the big question is: will you be
able to manage your cash flow
effectively? If you are not sure, then you are on shaky
ground.
Les Masonson, author of Cash, Cash,
Cash: The Three Principles of Business
Survival and Success, says cash flow is
all about, "getting the money from
customers sooner, paying bills at 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."
Let's break down Masonson's tips one at
a time.
FAST COLLECTION
In your business, you should collect
money as fast as you can. To do so,
try these four things:
(1) Try to speed up customer orders by
having them fax their orders to you.
(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 lock box (post
office box strategically located
near customers to reduce mail time) to
collect your mailed checks from
customers across the country. You lockbox bank picks up mail around the
clock including weekends, processes the
checks and credits your account.
(Note:
this last step is probably more appropriate for businesses grossing
more than $25 million annually. You may not be there yet, but keep it in
mind for when you get there)!
DEPOSIT CHECKS FAST!
This seems only obvious, but it's
extremely important. In fact, here are
Masonson's six sure-fire suggestions
for getting the fastest availability
on deposited checks.
(1) Always deposit 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
your bank give you the customer
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.
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 on the
deposit at the ATM, and you get no
receipt at the Night Depositor.
(4) MICR encode your customer's 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
more than 500 checks per month.
Banks charge 3 to 5 cents less for each
encoded check. Used encoded
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 you bank about 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!
In that case, you lose an entire day's float, even though you did
your bit to get the checks cashed.
HAVE A SUPER TIGHT ACCOUNTS
RECEIVABLE POLICY
Many people think it is no big deal to
neglect accounts receivable until
bills are collectible. This is bad cash flow policy. Here are seven
excellent tips for handling accounts
receivable:
(1) Check the financial health of a new
customer before offering them
credit.
One way of doing this is by using a rating service, such as Dun &
Bradstreet (1-800-234-3867).
(2) Ask a new customer for five
business references and don't neglect to
call them.
(3) Don't offer too generous discounts,
such as 3% for payment in 10 days.
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. These may seem
a bit extreme, but the first letter
should go out the very day the amount
is one day late! After 30 days late, start 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." Ask
your bank if they offer Return Item box
service. If they do, then use it
to redeposit your check and charge back
the bank return item free to your
customer.
These seven steps are tough and
unrelenting, but they may make the
difference between a positive cash flow
month and a sluggish month for your
business.
It may seem a bit hypocritical to demand
swift and exacting payment, and
then do what we suggest next. But just remind yourself, all (almost) is
fair in love and war and business.
DISBURSE YOUR MONEY SLOWLY
Just the opposite of collecting at the
earliest possible moment, you should
never pay a day sooner than you have
to, unless you get a discount for
doing so. A lot of people believe in staying ahead of
bills and paying
them as early as possible, but that's
just poor cash management. You want
to keep your money in your hands as
long as you can. Here are five
suggestions to slow down your
disbursements:
(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 mail float over the weekend.
(3) Use business credit 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 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. 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.
Now, many small businesses neglect to
reconcile their monthly bank
statements or assume that the bank
never makes a mistake. Banks do make
mistakes, and you must stay on top of
your disbursement to control your
cash flow. If you are one of those people who simply
can't stand to
balance you check book, you can use a
bank's standard account reconcilement
services for a low monthly price -- $30
to $70 base charge and 5 to 7
cents a check. When is it best to use a bank's reconcilement
service?
Here are six suggestions:
(1) When you have a monthly check
volume of at least 500 checks.
(2) When you need specialized reports.
(3) When you are currently performing
your own reconcilement.
(4) You can find software at a
reasonable price that meets your needs.
Companies offering accounting software
include DacEasy, Inc.
(800-877-8088); Real world Corp
(800-678-6336) and Peachtree
(800-247-3224).
(5) When you don't have your own PC or
any other kind of computer system.
(We already warned you about that).
(6)
When you have no staff to do it, or time to do it yourself.
NO EXTRA MONEY IN YOUR BANK ACCOUNT
Many businesses make the mistake of
keeping too much money in their bank
accounts to pay for bank services. This money could be used more
effectively elsewhere -- such as to pay
off a loan or to invest at a more
competitive rate. Many businesses have no idea how much money
to leave in
the bank or what alternatives they have
to compensate the bank. Take some
time to find out what your minimum
balance needs to be.
GET AN ACCOUNT ANALYSIS STATEMENT
How do you know how much money (bankers
refer to this as "balances") to
leave in your checking account to pay
for bank's services? That's a
question that more business owners
should be asking themselves.
(1) First, get a price list which shows
how much your bank charges for
services like account maintenance,
checks deposited, checks paid, stop
payments and wire transfers.
(2) Ask the bank to send you a monthly
"Account Analysis Statement."
The
analysis statement contains the average
balance levels for the month --
both the ledger and the available
balance -- as well as a listing of
services used, their transaction
volumes and cost. This statement should
be obtained in addition to the regular
monthly bank statement.
(3) Look at the account analysis to see
whether you are overcompensating
the bank. Then pull out any excess funds and invest
them in a
high-yielding money market mutual fund,
for example.
A word of advice: Smaller banks may not know what you are
talking about
when you ask for an account
analysis. Larger banks often offer such
a
statement, but you have to ask for
it. And don't let them charge you for
this kind of statement since it is only
an invoice.
INVENTORY IS NOT CASH
Every item you have sitting on your
shelf should eventually be transformed
into cash in your bank account, and the
sooner the better. As long as it's
inventory, it's basically dead
weight. If it is not moving, you're not
having cash flow.
Here are six recommendations to
minimize the cost of your inventory:
(1) Attempt to forecast as accurately
as you can the day, week and month
what you expect to sell.
(2) If you are dealing in more than one
item, determine which item accounts
for 80% of your sales. Then minimize ordering other items that are
selling
poorly or infrequently.
(3) Determine how fast you can get
inventory, once you order it. Try to
order as late as you can. Some firms can use "just-in-time"
inventory
which enables them to receive their
order the day they need it.
(4) Determine your economic order
quantity and don't order too much
inventory just to save a few pennies.
(5) Shop around and make sure you are
getting competitive prices.
(6) Develop a policy for determining
what is obsolete inventory, and how
you can get rid of it. The best way to get rid of dead inventory is
to
sell it whatever you can get for it,
even if that's only 10 percent of what
you paid for it. At least it will generate cash flow.
DON'T FORGET CONTINUITY SALES
Once of the most exceptional ways of
controlling and improving cash flow
well into the future is by employing
something called continuity of sales
or services.
Continuity sales are simply a contract
to purchase products or services on
an installment basis for a fixed period
of time.
That may sound complicated, but in
practice, it actually is not. The best
example of a continuity sale is a
magazine subscription. 12, 24, or 36
issues delivered each month for X
amount of dollars. The bigger the
subscription, they better deal you
get. The publisher gets more money up
front, and the customer gets a better
deal in the long run.
Continuity can apply to anything.
Let's say you own a dry cleaning
business. How about an annual deal to
clean 5 shirts or blouses per week for
set amount of money? Get people to
pay your for the entire week up front
for a lot of fast cash flow. You'll
trade a discount for getting business,
but you'll ensure a steady cash flow
for months to come.
Continuity works with just about any
kind of product or service you are
offering, from dry cleaning to to your
personal consulting service.
You can structure payments for
continuity sales on almost any basis, but
it's best by far to go for complete
payment up front. After all, the
discount is based on a customer's
commitment, and they'll be a lot more
committed with their money on the line.
LICENSING AGREEMENTS
After all is said and done, if you were
to list the assets of the company
you have created, you'd probably
include your inventory, equipment,
accounts receivable, equity, and so on.
But by this time, especially if you
have been reading carefully, you have
something more -- something that is not
necessarily a physical "thing" such
as cash or inventory.
If you've been a clever business
person, you have come up with certain ads
that have outpulled your
competitors. You have developed policies
and
procedures that have kept your returns
and refunds the lowest of any
around.
Or you may have come up with a money-making technique that is
completely unique. If so, you are potentially sitting on fast
source of
cash.
You can license the rights to use any
of your specialized techniques or
assets to other non-competitive
businesses. You can do it for a flat
fee,
a percentage of profits, on a royalty
basis, or any other way that makes
sense to you. You can also conduct seminars to teach your
techniques to
other would-be work-at-home
entrepreneurs and charge whatever the market
will bear. It's easy to generate an extra $5,000 a month
and much more on
the lecture circuit. While you are getting paid to spread your
knowledge,
you will be drumming up more business.
The knowledge you have in your head
right now could very well be worth a
lot of money. It's only a matter of you looking within
yourself and at
your successes to see how you can
transform it all into real, hard cash.
