Thriving when times are tough: Cash Is King

Thriving when times are tough: Cash Is King

April 2009

This is part one of a year-long series dedicated to helping keep your business strong in a troubled economy.

THE RECESSION. Since there isn't a crystal ball to help us predict how long it will last, we're forced to use the tools we do have - our business smarts and instincts - to get through it in one piece.

Use these conditions as an opportunity to get back to the basics. If the daily operations of your business have taken you away from essentials like cash management, there is no time like the present to put your focus back on this critical function.

Cash has long been considered the lifeblood of a successful business. Managed well, your company is healthy. Strong. Sustained. Managed poorly, you may be seeing red.

For sound cash management, start with your billing, collections and payables functions. If they aren't operating efficiently, then you are likely to find yourself in a sticky cash situation. Try to bring in cash as quickly as possible, but time your payments so that you're holding on to your cash as long as you can without incurring any late fees or penalties.

Then take a look at your credit policy. Be selective about who you give credit to - and how much credit you give them. Interview potential customers, check their references and look at their credit records. If they pass the test, set their limit low at first and gradually increase as they gain your trust. Don't put more emphasis on closing the deal than you do on cash management. Selling your product or service to someone who doesn't pay is more detrimental than not selling it at all - non-paying customers are a huge threat to your company's cash.

And make sure your sales team knows who is behind on payments, so no more sales or services are conducted before the check hits your mailbox.

"You've really got to pay attention to your receivables," said Rea CEO Lee Beall, CPA. "We've shortened our collection period from 120 days to 90 to help our cash flow." If you are still in a cash crunch, look for any unnecessary assets you can sell. "Even if you have a building that isn't necessarily worth a lot, you could save operating costs by selling it - that's one less thing you have to pay to maintain," he said.

Once you have your cash situation in check, it's time to plan for the future. Just like you have an emergency fund for your family, you should understand your business's situation and plan accordingly. An economic contingency plan can help you react logically - instead of emotionally - to the unexpected. "Sit down and plan what you will do if XZY happens," said Beall. "Analyze your expenses and cut wisely to get the most cash on-hand as possible."

Beall also suggested arranging a line of credit if possible, even if you don't have an immediate need for one. "Get it in place well before you'll need it. You may be surprised to find that banks are making loans to creditworthy people."

Finally, look at other ways you can save. Is your retirement plan operating as efficiently as it could? Do you participate in a 125 Plan to save on payroll tax? Have you conducted a state and local tax review to ensure you are in compliance? Talk to your advisors to pinpoint easy changes that can have a huge impact on your business.

Until we are out of the weeds of this recession, it's imperative to make smart business management decisions. Start with your cash to ensure your business is sustained on a solid foundation.