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Understanding vital to controlling cash flow

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Cash-flow management is essential for small businesses to succeed and grow effectively, said Rayanna Anderson, assistant director of the Missouri Small Business Development Center.

Dottie Creedon, a semi-retired small-business owner, agrees. Creedon has owned several small businesses in the past 20 years including a print shop, a used furniture store and, now, a cleaning business and an antique furniture refinishing business in Branson.

Cash flow problems struck Creedon during her experience as owner of Acorn Printing.

"The print shop was phenomenally successful, and yet, we had no cash," Creedon said.

The main place cash flow problems are seen is in a growing business, Anderson said. It could be a start-up or an existing business that is in a fast growth mode.

Creedon's print shop was in a fast growth mode, she said. "Growth was used to finance growth," Creedon said. "In one year, we more than doubled it that ought to tell you what went into it. It grew too fast."

"Growth eats money without any conscious planning decisions," Anderson said. "The main problems with cash flow occur on a day-to-day basis."

Anderson advises that business owners use cash forecasts to anticipate cash flows.

When a business is projecting cash flow, it isn't projecting when the sale will occur, but when the company will get paid for it, Anderson said. Many business owners don't realize how long it may take to collect payment for their business.

Creedon's experience bears that out. "We were getting paid (for services)," she said, "but we would have to go after it."

The people who bought Acorn Printing from Creedon had more capital for growth. "If we had (the working capital) we wouldn't have had the growth problems," Creedon said. "I would never want to go into business again owing as much as we did."

Anderson said she recommends that businesses do cash forecasts monthly.

"Until you get to (the point where) cash in equals cash out, you are using cash," she said. "The larger the amount of cash, the shorter the time (should be) between forecasts."

Businesses should set up a system to track the cash flow, she said.

"To really be able to track it, you have to understand it," Anderson said. "You have to understand where your company gets cash, and in what timely manner it gets it and where you use cash."

Computer programs are available that can help the small-business person, Anderson said.

"There is a lot of wonderful software out there that will enable you to, if the accounting is done correctly, pull wonderful reports that will tell you a lot of this," she said. "But ultimately you have got to understand what is happening and what it is telling you."

There is nothing wrong with having a manual system, as long as you have a system and you understand it, she said.

Once you understand it, Anderson said, the keys to cash flow are relatively simple:

?Have a system to track it.

?Do it on a regular basis.

?Project for future cash needs.

In the system, there should be some way to monitor your sales and collections. Anderson said that there should also be some way of dating or tracking the age of accounts so the business can react quickly.

"The sooner you can react to any collections or payable problems, the better your odds to resolving the situation," Anderson said. "The problem with waiting to the last minute, when you are in a crisis, is you erode a lot of your credibility with your banker."

Cash-flow problems are usually the result of collection, cost, or sales and marketing issues, Anderson said. Contact is a a key to collection issues, Anderson said.

"It's been proven that billing twice a month will get you paid faster," she said.

A business may want to charge interest on a late bill, she said, or perhaps offer discounts for quicker payment. Follow-up contact is important, she said.

Addressing the cost issue can be more difficult. "Unfortunately some businesses don't really understand their true cost of selling an item," Anderson said.

A business should find its break-even point, Anderson said, and sales goals should be set at that point.

A business' salespeople may not be selling enough to meet the break-even point established when cost was addressed.

If a business is not selling enough, a marketing plan should worked out to increase sales, Anderson said.

The key to managing cash flow is record keeping, she said. Know where your money is, where it's coming from and where it's going. [[In-content Ad]]

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