FLORIDA SMALL BUSINESS DEVELOPMENT CENTER AT IRSC
CASH FLOW CAN BE DIFFERENCE BETWEEN
SUCCESS AND FAILURE
Michael Bernard’s consulting
experience comes from
his work with several
international accounting
firms in their management
consulting departments,
working with Fortune 500
companies throughout the
United States. He has also
worked for several local and
regional accounting firms
as both a manager and
principle in charge of their
consulting operations in
South Florida before opening
his management consulting
company in Miami.
TCBusiness.com 21
What’s the No.1 reason small businesses
fail? Cash flow, not lack of profits. About
80% of small business failures happen
because of poor cash-flow management.
Mike Bernard, a consultant at the Florida
SBDC at Indian River State College and a
financial specialist, says he hears it all the
time from his clients: “My business made a
profit last year, but I don’t have any money
to pay my bills.”
Bernard notes that many of his clients
have sizable sums of their operating cash
tied up in accounts receivable or inventory.
Remember, cash flow is not the same
as profit.
Are you profitable but still struggling
month to month in managing cash flow?
You are not alone. Managing when money
enters and exits a company is crucial to
business survival and growth.
“A lot of businesses can sell their products,
but they don’t understand their working
capital cycle,” Bernard said. “A company,
as we teach in our Profit Mastery seminars,
can sell itself right out of business.”
As businesses continue to grow, they
must control their cash flow. For example,
business owners get excited when they
get a government contract. However, they
need to understand the specific terms
attached, like not being paid for 60 to 90
days. Meanwhile, you have to buy inventory
and pay your fixed overhead expenses.
Can you sustain that? If you cannot and do
not get additional capital, sometimes it is
better not to pursue the contract.
What else can you do so your business
does not become a statistic? The first
and perhaps most important is to set
aside time in your week to consider your
strategy and to understand your financial
information.
Small businesses are so much into dayto
day operations that they do not think
enough about the cash flow cycle. You
have to be constantly vigilant about looking
for ways to improve your cash flow. It is
the lifeblood of your business.
“A business owner needs to regularly
review and analyze the business’ financial
statements and working capital cycle,” Bernard
said. “Is this the best you can do, or
are there additional strategies and tactics
to generate and improve cash flow?”
Bernard also notes, a thorough review
of business payables and receivables can
uncover opportunities to shorten the
operating cycle.
A FEW MORE IDEAS
• Every industry has its own set of metrics.
The FSBDC at IRSC has a database of these
metrics to help you analyze how you are
doing compared to your industry.
• Make it a daily routine to review the
actual daily cash balance.
• As you recognize potential cash flow
problems, create strategies that correct
the problems.
• ACCOUNTS RECEIVABLE
Consider granting discounts for prompt
payment, such as 2-10 Net 30 2% discount
if paid in 10 days, or full payment in
30 days.
Also, ensure that your terms are not too
long and that your receivables are quality
accounts to keep delinquencies down.
• ACCOUNTS PAYABLE
Be careful on the payables side, also.
Buying inventory that does not move
becomes stale and then obsolete. In addition,
this time, you want terms on your
side — as long as possible to pay and
negotiate volume discounts.
• INVENTORY
Compare inventory turn rate to the
industry average metrics to see how you
compare. Remember, inventory that does
not turn fast enough is money left on the
shelf that could be in your pocket.
Have a sale for slow-moving inventories
or donate it to a nonprofit for a tax writeoff,
and negotiate just-in-time contracts
so that you can keep as little inventory on
hand as possible.
• To increase cash flow from sales growth,
open newer, less costly distribution channels,
increase prices where you can and
introduce new technology to help reduce
sales costs.
• Spend and collect with care. Watch
overhead costs, always negotiate on price.
Give credit very carefully but collect very
aggressively. v
This article is provided by the Florida SBDC @
IRSC, the Small Business Development Center
within Indian River State College’s School of
Business. The center’s team of business experts
works one-on-one with hundreds of entrepreneurs
and business owners each year by
providing confidential, no-cost consulting. The
center’s mission is to help Treasure Coast businesses
grow and succeed.
BY NANCY DAHLBERG
/TCBusiness.com