Cash flow strategies and the importance of planning and monitoring

Profits are up, so where's the cash? This question is all too common for many companies, and ironically, even profitable companies can have cash flow problems. For years, lack of control over cash flow has been a major contributing factor to the high rate of insolvencies; therefore, it is a subject that should be taken seriously by all companies. In simple terms, cash flow planning is the charting of cash movement into the production process, then into accounts receivable, and back into cash. Preparing a cash flow plan is merely an attempt to predict the flow into and out of cash during a future span of time. In our experience, companies with the most control over this process are the ones most likely to be in business 10 years from now. Cash flow problems can be caused by a number of factors, many of which are unrelated to profitability. Examples include: * Excessive labor; * Payments made to suppliers or subcontractors before receiving cash payment from the related project; * Retainage; * Cash purchases of fixed assets; * Time lags between billing and collection of receivables (slow payers); * Investments in joint ventures; * Cash used for outside investments; * Cash advances or loans to officers or employees; * Overstock of inventory; * Unfavorable legal settlements. Cash flow problems can be controlled if they are identified and addressed early. If ignored, they can result in increased interest expense, diminished credit ratings, inability to take advantage of new opportunities, and ultimately, failure of the business. Many companies hesitate to engage in cash flow planning under the popular misconception that meaningful cash flow forecasts aren't possible. Although it's not an exact science, proper cash flow planning can help a business make intelligent decisions regarding budgeting, capital expenditures, financing, compensation and growth. It can help make the company more efficient and inspire the confidence of bankers, investors, customers, and other business partners. In order to maximize cash flow and income, the data required to implement and monitor cash flow, ideally, should be integrated with the company's procedures for estimating and budgeting and for scheduling and monitoring performance of work as it progresses. With today's advanced computer systems and lower prices for sophisticated software programs, there is little reason for companies to be unable to accomplish this integration. Project planning is fundamental to the task of preparing a cash flow analysis. In order to analyze cash received and cash disbursed, the company must have a good understanding of when it is going to perform various segments or activities that comprise all areas of its operations. It cannot be calculated simply as a function of time. Cash Flow Strategies While planning and monitoring are extremely important, there are also many simple action steps companies can take to improve cash flow, boost cash reserves, and strengthen borrowing capacity: * Schedule payments by due date, considering the relative costs and benefits of any available discounts for early payment. Mail checks as late as possible but avoid late payments. * Obtain deposits from customers prior to commencing work. * Offer discounts to customers to entice prompt payments. * To avoid borrowing from a line of credit, match payment to suppliers with collections from related projects. * Sell old or outstanding inventory at a discount to increase cash. * Establish credit limits for slow paying customers. * Work with vendors that have flexible payment terms. * Be sure that additional work or changes in scope are billed and collected as soon as possible after they are approved. * Establish an adequate credit line with a bank. * Secure long-term financing for fixed asset purchases. * If possible, consider leasing rather than purchasing fixed assets. * Make sure that delayed payments include increases for the cost of cash. * Consider depreciation methods for tax purposes that accelerate deductions and decrease tax liabilities. * Get involved in the tax planning process. Understand the tax impact of various activities and strategies. Cash flow is just as important to a company as profitability. Cash flow planning is challenging and inexact, but it is critical to be aware of potential problems in order to minimize their impact on the business. Jed Dallek, CPA, MST, is a tax partner at Grassi & Co., Lake Success, N.Y.