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Cash Is King-Long Live the King
(Part 2 of 2)

General Business News

September 2005

Cash Is King-Long Live the King
(Part 2 of 2)

Last month, we talked about one of the major concerns of small businesspersons - cash flow. Even though we use the term cash flow, which means the sources and uses of cash, a better term to describe a small businessperson’s real concern is "cash outflow." If you are like the rest of us, you generally don’t have a problem with the idea of having a great cash inflow; it’s just a matter of getting the customers to pay their bills. But cash outflow is the thing that eats your lunch every payday and every time you pay the monthly bills. Let’s see if we can help you take back your lunch from the cash outflow monster.

What exactly makes up the expense side of your income statement? Are you a manufacturer, a service business or retail outlet? Is your business a one-person shop, or do you have partners and/or employees? The answers to all of these questions have an impact on your cash outflow.
For example, let’s say you’re in the custom embroidery business and have no employees. Your payroll expense is basically what you take out of the business for personal expenses. Any income and self-employment taxes are paid through quarterly estimates. All you have to consider for outflow is four quarterly payments. On the other hand, if you have employees, you will also have to plan for monthly payments of income, Social Security and Medicare taxes. Remember, the penalty for paying Federal withholding taxes late is far greater than failure to pay estimated taxes.

Whatever your cash outflow may be, there are some basic rules you should keep in mind. The first consideration comes before you even purchase materials for your business. If your business relies heavily on materials, you will want to negotiate the best prices for those materials. Check with your suppliers and see if you can negotiate discounts in exchange for long-term purchase commitments. Make sure you negotiate reasonable delivery and payment schedules. This will reduce your material costs, which will reduce your outflow. Make sure that you do not carry excess material inventory and your cash outflow coincides with your cash inflow. If you receive your cost savings in the form of early payment discounts, be sure to take advantage of those discounts, even if you have to borrow on a line-of-credit.

What is your expense payment process? Do you pay bills twice a month or maybe even once a month with a few odd bills that must be paid sooner? If you are one of those business owners who pay bills within a day or two, give us a call; we definitely want you as a client! All kidding aside, if you do pay bills almost immediately, you should sit down and take a good look at how moving to twice a month payments would impact your cash flow. You would probably find that it would dramatically affect your ability to meet cash needs as they come due. Paying bills when due as opposed to paying on what may make you feel good will help you control cash flow better and keep important vendor relationships intact.

A key consideration is the wise use of debt. To the extent you can, you are far better off using long-term debt to purchase fixed assets and use short-term debt to meet temporary cash needs. For example, if you are purchasing a building, negotiate a reasonable long-term payment schedule. Since the building cost will be recouped over a long period of time through it’s utilization in you business, it doesn’t make sense that you would want to use your line-of-credit that comes due each year. If you tie up your short-term credit lines for fixed asset purchases, you will soon experience problems in meeting day-to-day cash needs.

Planning your cash outflow is critical to your financial success. If you have been in business for a while, you will most likely have the data necessary to develop a good cash outflow plan. Even if you haven’t been in business for long, you still have some data to use for budgeting. Any holes in your historical information can usually be closed with the aid of industry standards and statistics. Unfortunately, running a business takes a great deal of time and you may not have the time to devote to such planning, but we do. Give us a call and let us show you how we can enhance your planning process.

Have a great September and don’t work too hard on Labor Day.
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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