Five Tips for Successful Cash Flow Management

by Lonnie Bass 29. March 2016


Perhaps you’ve seen a trendy café in your neighborhood suddenly shut down. Or maybe you’ve seen a local nail salon go from one bustling location to a six-shop regional chain to bankruptcy in under a year. 

Much less visibly, thousands of trucking companies, landscapers, plumbers, and graphic designers hang out their shingles every year. Then, after a little while – even if they’re growing and making profits – they close up shop.  

These business failures usually stem from cash-flow problems. That’s because revenue growth and hefty profits do not equal cash. Without cash, a business can’t pay its creditors, its landlord, or its employees. And no business will stay open long if it can’t do those things.

Cash is the lifeblood of any business – making successful cash-flow management among the most crucial parts of running yours. You track accounts receivable, accounts payable, and your business’s other key numbers. And you work constantly to cut expenses and increase sales – and to get your hands on the cash those sales promise.  

 According to a 2013 University of Tennessee study, 25 percent of new businesses fail after one year, 36 percent fail after two years, and 44 percent fail after three years in business. And Dun & Bradstreet Small Business finds that 90 percent of small-business failures are due to shoddy cash-flow management

Now, grasping cash flow’s importance is relatively easy. Maintaining positive cash flow is much more difficult, even for profitable businesses. These five tips will help business owners of all sorts do the work necessary to achieve that.                   

1. Be Conservative 

Start out by creating a realistic budget, calculating when you expect to break even and working toward that. Include everything – operating expenses, salaries, taxes, equipment maintenance and raw supplies – in any budget.

Further, be conservative in your spending. Consider the benefit every time you reach for your checkbook or credit card. When equipment breaks down, repair it. And if you have to replace, consider buying used equipment. One more “conservative” tip: Set aside the funds you’ll have to pay taxes with as you incur those taxes rather than digging up cash when they’re due.

2. Get Paid

It’s crucial to make collecting receivables a top priority for your business, which is why you need to ensure you have the right people in place to get the job done.

Start by hiring an experienced controller or CFO to ensure finances are being properly managed. (Your CFO or controller is more than a collection agent and bookkeeper, of course; he or she should also have experience in forecasting growth and in developing place strategies to support that growth.)

Next, set clear policies for “collection days” – how long you’ll wait to get paid – including penalties for late payments, such as 5 percent after five days late. You can also provide incentives and discounts for early and cash payments. If you’re a contractor, invoice your clients early and often – don’t wait until a project is over before sending your invoice. Set up a payment schedule before starting work.

And then follow up on those policies. Stop work after 30 days if you haven’t been paid. Call as soon as a payment is late – and then every week after that. First-time entrepreneurs may think they can depend on collection agencies for this work, but they should be a true last resort. They take 30 percent or more and usually end up collecting just pennies on the dollar.                    

3. Pay Your Bills

Late fees add up quickly – and, worse, lead to bad reputations. So, watch your “payment days” as closely as you watch your “collection days,” and err on the side of caution when it comes to paying vendors on time. Don’t abuse generous deadlines – get a good reputation and keep your balance sheet clean at the same time.

Don’t be afraid to ask for discounts for early and/or cash payments. Moreover, feel free to “barter” for equipment, contractors, raw materials, etc. Most businesses are happy to haggle in order to land a steady customer who pays on time.                                     

4. Keep the Shelves Bare

It may seem counterintuitive, but if you’re selling a product, keep on hand the least amount of inventory as you can get away with. After all, every dollar you’ve spent on inventory is a dollar you don’t have in cash. And without cash, you can’t do anything. So watch your "inventory turnover" – how long your inventory sits before becoming a sale – like a hawk. And always work on reducing that number.

To keep an eye on these cash-flow metrics, there are numerous cash-flow calculators available online, including one from 1st Mariner Bank.

5.  Have a Backup Plan

It’s important for businesses to retain earnings and build net worth to weather difficult times.

In fact, new businesses should always have enough cash on hand to cover two months of expenses. Larger businesses should ratchet that up to three to six months’ worth of reserves. Keep your cash reserves in an interest-paying account, not long-term hard-to-access CDs or stocks or other riskier investments.

All businesses should consider keeping an open line of credit. And many businesses end up having to take out a loan to get through a cash crisis. So make sure your bankers know you – and keep them informed about events that impact cash flow, such as a growth spurt or a major customer behind on payments. If you regularly demonstrate a clean operation, they’ll be much more likely to make that loan when you really need it.

Cash flow management can be daunting at first – and remain challenging throughout the life of your business. But if you keep a realistic budget, manage your expenses and payments due, maintain a healthy “rainy-day fund,” and keep your expenses down, you’ll be doing better than most of your competitors. And you’ll soon be overachieving when it comes to revenue growth and profit.

You may find yourself in need of help along the way. Before calling in expensive consultants, consider contacting the Small Business Administration. 

The 5 HSA Mistakes Too Many People Make

by Andrew Schreiber 25. February 2016

More people are signing up for Health Savings Accounts (HSAs) than ever before. As of the middle of last year, about 14 million Americans were enrolled in one, up 25 percent from 2014. Indeed, the current requirements to qualify for an HSA as an individual are fairly simple: you must be covered under a high deductible health plan (HDHP); that you have no other health coverage (with a few straightforward exceptions); that you aren’t enrolled in Medicare; and that you can’t be claimed as a dependent on someone else’s tax return. And the benefits of participating are enormous: your contributions to an HSA are tax-deferred and portable. 

How to best manage an HSA and your contributions to it, however, are somewhat more complex.

As more employers and individuals turn to HDHPs because of their lower premiums, more individuals are discovering that they are qualified for an HSA. If you’re among them, this list will help shed light on some of the most common mistakes people make with HSAs, and how to avoid them.

Contributing Too Little, Or Too Much

Determining how much to contribute to your HSA is different for everyone, of course, and variables include everything from how much you’re making (read: how much you can afford to contribute) to your current and anticipated medical expenses. The contribution limit for individuals is $3,350 and $6,750 for families in 2016.

One factor in deciding how much to contribute is your own risk tolerance. How concerned or unconcerned do you feel about the possibility of a catastrophic health event that may never occur? Those who feel anxious about the potential medical costs associated with, for example, getting into a car accident, will want to consider contributing a robust amount to their HSA. Those more comfortable with betting they’ll continue to stay healthy, however, or have other significant and pressing monthly expenses, will consider contributing less.

Regardless of how much you choose to contribute, many experts agree that participating is a good idea, since HSAs can be viewed as another way to save for retirement, and because many employers that offer HSAs (by some estimates, as many as 84 percent) make tax-free contributions to employees’ accounts.

Losing Track of the IRS’s Contribution Restrictions

The IRS will penalize you if you contribute too much to your HSA, period. The penalty is a 6 percent excise tax, which accrues every year the excess goes uncorrected. That’s why it’s important to stay on top of how much you’re allowed to contribute from year to year, because these figures do change. For example, the maximum contribution for a family HSA increased by $100 this year. Fortunately, there are ways of correcting the mistake if you have exceeded the maximum contribution amount. You should contact your HSA provider as soon as the mistake is noticed.

Confusing HSA Rules with FSA Rules

There are major differences between HSAs and Flexible Spending Accounts (FSAs), but one wouldn’t be alone in confusing their specific qualities. Among the big ones you’ll want to pay attention to:

Your hard-earned HSA funds can be rolled over to subsequent years’ savings. That is NOT the case with FSA funds, which require participants to spend down the money in their accounts before the end of the year or forfeit those funds entirely.

Your HSA will follow you when you change jobs. With few exceptions, this is not the case with money in your FSA fund.

HSA funds are more flexible in the sense that you can change the amount you choose to contribute at any time. With FSAs, you can only change your contribution amount during open enrollment or under other very specific circumstances.

Misusing HSA Fund Money

Be careful not to swipe that HSA debit card for anything except medical expenses. The IRS frowns on the misuse of HSA funds — to the tune of a 20 percent penalty for non-qualified expenses and liability for income taxes upon withdrawing funds.

Not Correcting Mistaken Contributions or Withdrawals

Fortunately, the IRS accounts for the fact that over-contributing and mistaken charges happen to the most well-intentioned HSA participants, which is why there is recourse if you stumble into one of these circumstances. Say, for example, that you pay a medical bill using funds saved in your HSA that you are later reimbursed for because you didn’t realize that expense was fully covered by your insurance. The money in such cases must be returned, but there is no penalty. It’s that simple.

When used correctly, HSAs provide an excellent option for individuals participating in HDHPs. But determining how much you wish to contribute per month, what expenses can be covered by HSA funds, and more can be complicated to unravel. Resources like our “HSA: Is It Right for You?” guide can help you determine what will work best for you. Or, reach out —we’re here to help you maximize your HSA’s potential.

The Cost of Valentine's Day

by Jhonell Campbell 11. February 2016

With Valentine's Day around the corner many lovebirds have already made plans for the special day. If you're still trying to decide what to do or buy for your loved one, we're here to help. Whether you prefer a relaxed night in or an extravagant night out, we've broken down the costs of the most popular Valentine's Day gifts and activities.

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