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Cash Flow, Overhead and Borrowing

David L. Wolfe
Nov 9, 2005

There are three areas that owners and managers must always pay close attention to: cash flow, overhead control and borrowing.

Cash flow

When it comes to cash flow, liquidity is always a top priority. Here are a few things management might consider to improve cash flow:

• If market conditions allow, increase prices selectively. Small increases in prices on some goods or services can boost cash flow (and net profits/income). Most companies can increase prices on some products for some customers.
• Bill customers as quickly as possible and pay vendors as late as possible, but within credit terms.
• If appropriate, increase the line of credit with the bank – one that meets the short-term cash requirements of the business. It would be prudent for management to meet with the bank to ascertain the feasibility of this strategy.
• Use cash discounts as an incentive for customers to pay early.

Overhead control

Managers should put some good budgets in place to hold operating costs down as the company grows. These budgets help direct the company by showing where certain expenses are out of line. Managers should also make sure the budgets go right into the accounting system so they can pull good budget reports.

Borrowing

Leverage is using a small item to bring in larger results. Financial leverage can make a business very successful, or it can work against a company, depending on how it is used. Borrowing went down, but so did many other indicators, including the net profit margins, net profitability and overall liquidity. It is difficult to tell what this means for the future.

It is also important to bear in mind that profitability fell at a faster rate than debt. On the surface, this may indicate that reducing debt additionally may not be the way to drive profitability for the company at this time. Of course, only managers inside the company can determine for certain which resource areas need attention.

This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 11/9/2005.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

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