A weekly look at Wyoming business questions from the Wyoming Small Business Development Center (WSBDC), part of WyomingEntrepreneur.Biz, a collection of business assistance programs at the University of Wyoming.
By Bruce Morse, WSBDC Region 2 director
"My accounts receivable are high and, consequently, my cash flow is tight. Do you have some suggestions for improving it?" Paul, Newcastle
Cash flow issues seem to be a concern for many small businesses and this time of year is usually more difficult.
First, let's define cash flow, and for the purpose of dialogue, I will call it the "flow of money into and out of the business." This includes revenue generated from sales, collecting that revenue, paying bills for both the cost of goods sold and fixed expenses and repeating the process.
Some small business owners may say, "My income statement or tax return says I made money, but my checking account is essentially empty." How can that be? There are some differences between cash flow and net income.
A business may have money tied up in accounts receivable, which shows up in revenue but has not yet been collected. Other areas could be excess or stale inventory, principal payments that don't reflect on the income statement but have to be paid with cash or owner withdrawals that has not been accounted for.
What can be done? Some tips to implement:
-- Beef up the business collection process and consider changing the credit policy.
-- Speed up billing. Send invoices weekly or twice a month instead of at month's end.
-- Negotiate longer terms with suppliers/vendors.
-- Be careful with taking discounts if cash is not available.
-- Watch inventory levels carefully and move out stale or excess items.
-- Take a serious look at expenses and cut where prudent, but be careful about what is cut, such as marketing. It is usually a large number and tempting to reduce, but that could have the exact opposite result of what is intended.
-- Anticipate cash needs (budget) and establish a line of credit to cover shortfalls.
-- Fire some customers. If they are not profitable, get them to the point where they are or weed them out.
If a small business owner needs help with analyzing personal situations or developing a strategy for the business, contact Wyoming Entrepreneur for pre-paid, one-on-one guidance.
A blog version of this article and an opportunity to post comments is available at http://www.wyomingentrepreneur.typepad.com/blog/.
The WSBDC is a partnership of the U.S. Small Business Administration, the Wyoming Business Council and the University of Wyoming. To ask a question, call 1-800-348-5194, e-mail wsbdc@uwyo.edu or write 1000 E. University Ave., Dept. 3922, Laramie, WY, 82071-3922.
