Cash flow key to business survival

by Jan K. Allen

SBJ Contributing Writer

CPAs agree that maintaining good cash flow is the key to success for all types of businesses. But the balancing act planning expenses to coincide with expected revenues, plus dealing with the unexpected expenses is tricky.

Business cycles vary for different types of businesses, and each individual situation is also different, according to John Roy, of the firm Mitchell, Roy & Wilson.

Lots of businesses use a line of credit from the bank to tide them over during the times when increased supply or inventory is needed to gear up for future sales, Roy said.

Fixed expenses are the same no matter what the profit margin in a given period, and items such as rent, utilities, insurance and payroll have to be allowed for in the slow months as well as with the good months.

Certain unplanned expenses need to be considered, such as costs incurred to keep up with rapidly changing technology, Roy said. The latest software package may be a great benefit to a business, but it can also be an untimely added expense.

Businesses should take advantage of tax breaks and decide whether it is best to depreciate or expense a short-term piece of equipment.

"If equipment can be expensed in a given year, that is usually the way to go," Roy said.

Retail businesses must determine the best time to stock up on inventory.

This often means expenditures precede profits.

For this reason, among others, retailers want a fast turnover, Roy said.

CPAs need accurate financial information to help businesses determine a plan to manage cash flow, said Shelly Summers, a CPA with Roberts McKenzie, Mangan and Cummings.

Several factors figure into the quotient, and the better prepared the business owner is, the more complete the picture.

"Each industry has its own quirks," Summers said.

A restaurant business would have different considerations than a building contractor. A retail business has traits all its own.

But business cycles are predictable and, to some extent, manageable with careful planning.

From business to business, the situation varies based on the current trends for the industry, and the debt ratio and fixed expenses of a particular business within an industry.

To ensure adequate cash flow, business owners must look at everything that has an impact on their business, including the economy in general.

They must compare fixed expenses and variable expenses. They need to examine what they are buying and why they are buying it.

They should take into consideration whether they own or lease the property they use, Summers said.

The CPA can help a business plan so it can take advantage of discounts. An accountant can also assist a business in setting up a money market fund to store surplus funds when profits are up to use as a reserve when the cycle takes a dip, Summers said.

The banker and the CPA can help keep the business on a steady course and avert possible disaster.

"We are very clear on 'don't do this,'" Summers said.

Roy Roberts, president of Roy M. Roberts and Company CPAs, said different businesses receive cash in different time frames.

They must study and know the trends within their industries and plan ahead for expenses that affect cash flow.

"You must measure what cash you need to cover these expenses, Roberts said.

Businesses can usually set up a plan based on past experience. They should know what the fixed expenses are each month and have an idea of what to expect in income in a given period.

In some industries, the ability to take advantage of discounts via early payments for supplies or inventory can greatly improve a company's profit margin.

The CPA can be instrumental in helping the client be a better manager of cash flow by understanding all the factors that make up and affect cash flow during the year, Roberts said.

A business owner must learn to analyze business needs and study the trends of the industry he is in so he won't get caught short.

If the company can reserve cash in high profit times, it might a avoid a trip to the bank in slower times, Roberts indicated.

Most businesses maintain a line of credit to help offset the slow times, but planning for these times by managing cash flow produces more income through the interest saved.

Inadequate cash flow is the reason a lot of new businesses fail, John Roy said.

If the profits are spread too thin you have to look for solutions, Roberts added.

"You can't just plug the leak," he said.

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John Roy, CPA, of Mitchell, Roy & Wilson, says rapidly changing technology can result in unplanned expenses.[[In-content Ad]]