… cash flow.

Shoot, this is even true for any nonprofit of any kind of substance.

And yes, my meticulous accountant’s brain is kicked into high gear in this response, but you need somebody in your corner who is thinking about these things, or your Louisville business or organization will die a painful death.

Because even if sales are flowing, your team is energized, and you have a killer business idea — unless you are performing profitably — you cannot last.

There are obvious things to consider when working on the top lines of your p/l (i.e. your revenue), but they are only a part of the overall picture for how to properly fuel the engine of your organization.

Last week we looked at how to forecast your revenue and sales. Well, let’s look at how that flows into your engine today … and how to keep it from breaking down.

(And a quick word about the federal government shutdown and tax season: we are proceeding “as normal” for now. Obviously, many are in a “wait and see” mode, and I won’t pretend to make any kind of smart prediction for when things will be politically resolved. And the IRS will be affected by this. But we will let you know if that actually matters for your tax filing. As of now … not yet.)

Kevin Roberts’ Small Business Cash Flow Controls

“Talent wins games, but teamwork and intelligence wins championships.” – Michael Jordan

I want to start this article by stating very clearly: we’re here to help think through your Louisville small business cash flow controls. If this is overwhelming to you — let us “step in” to take away the pain and paint the right picture for you. It is, in fact, what we do every week.

And although this might seem like the kind of information that is most appropriate for “early stage” businesses, there are a surprising number of later-stage Louisville businesses who could use some tightening in these areas.

How to Systemize Collecting Cash

Once you have determined a reasonable level of sales and you are comfortable with the forecast you have made, you must address questions such as: What percentage of sales are received in cash, and what in credit/receivables? For those that are receivables, how soon will the cash be collected? Do I have to wait for customers to pay me, or do third parties like Visa or MasterCard take the customer’s account and convert it to cash for me with an appropriate discount?

If you are relying on customer payments for collection of receivables, you must determine what portion of the receivables will be collected in thirty days, sixty days, ninety days and thereafter, and what portion, if any, may never be collected. To assume that 100% of your credit sales will ultimately be converted to cash is probably unrealistic.

Other sources of cash may be available in addition to sales. Do you expect to bring in a partner or other investors, or can you borrow money from a bank? When will you receive the cash, and how much will you get? Part of your cash flow analysis may be to determine how much investment money or borrowings will be required to operate your business.

Once you are comfortable with the cash receipts side of your business and the timing of the collections of funds from your sales and other sources, it’s time to take a look at the expenses and other cash needs of your operation.

Disbursements, aka EXPENSES

Certainly if your business entails sales of inventory, you will have to purchase merchandise from others or purchase the component parts and pay employees to assemble it. This, of course, may require a significant outlay of cash before even the FIRST dollar of sales is generated and received. So as a result, you should consider how often and what amount your employees must be paid and when their payroll taxes must be deposited.

Additionally, you need to know the credit trade terms your vendors are willing to advance you. Do you have to pay for inventory items on a C.O.D. basis or can you pay for them thirty or forty-five days after receipt? What expenses must be paid to allow you to convert purchased merchandise to salable inventory?

All of these items can be negotiated.

In addition to the cost of manufacturing, you should consider whether your productive capacity will allow you to generate enough inventory to support the level of sales which you are predicting (hopefully, with accuracy!). If the volume of sales you forecast is above and beyond your ability to produce today, what changes in your operating environment must be made to meet the production levels? Will you need additional employees? If so, how much will they cost? So, you have to acquire additional machinery and when will you have to pay for it?

Once you have determined the cost of operating your production or service facilities, you need to consider what other expenses you must pay to keep the doors of your business open. You typically will have to pay the rent for your office or merchandising facility.  You must consider how much the monthly payment is and when it has to be paid. Ask yourself if there will be other cash requirements such as a deposit on the first and last month’s rent.

If you are opening a new business, you must consider what your cash requirements are to make your facility ready for your specific needs and purposes. Will you have to buy or rent furniture? Will you need to make tenant improvements or pay deposits for utilities and other services?

You also need to consider many of the overhead items and costs to open a new business that will (hopefully) be one-time expenses. This may be an attorney’s fee for drafting partnership agreements if incorporating your business. In addition, you must calculate the cost to obtain new business licenses and authorization from the taxing authorities, set up an accounting system, buy stationary, order signs or logos, etc.

It may seem like the list of costs and expenses is endless. It may even discourage you in moving forward with your business endeavor. However, it is imperative to make the list as detailed as possible! Business success is about accurately predicting and CONTROLLING cash flow.

And, you must ensure that you have sufficient funds to make your operation ready for business before you run out of cash. The more detailed the list, the more sufficient information you can provide, the less chance there is of unpleasant surprises as your business grows.

And, of course, we’re here to help. This is what we do EVERY week with our clients. Let us know if you’d like to talk it over.

Feel very free to forward this article to a business associate or client you know who could benefit from our assistance — or simply send them our way. While these particular articles usually relate to business strategy, as you know, we specialize in tax preparation and planning for families and business owners.



Kevin Roberts

(502) 426-0000

Roberts CPA Group