1.   Collect your receivables. Almost every business has past-due receivables. Phone the people who owe you the most money, and try to resolve the problem on the spot. If you can’t get the cash flowing immediately, try to negotiate a payment schedule, or schedule a follow-up call.

2.   Chip away at overhead. Review “fixed” expenses, and identify those you can cut. Try this exercise: Review every canceled check for the past 90 days and decide if the expenditure was really necessary. Bad spending habits are developed when cash is plentiful.

3.    Control inventory. Inventory can be a black hole for business cash — money goes in, but it doesn’t come out until the product is sold. Take a careful look at your inventory of parts, supplies and products for sale. Sell at a discount, products that are gathering dust.  Scrap, rework, or return any other obsolete inventory.

4.    Don’t overpay estimated taxes. Many smaller businesses are allowed to pay quarterly estimates equal to either 90% of current-year or 100% of prior-year taxes. Make sure you pay the lesser amount, since that’s all the IRS requires.

5.    Review owner’s compensation. In many small businesses, the owner’s draw, salary or expense account is often a significant cash drain.  Reduce family expenditures. A little financial discipline at home may save the family business. Once you have current cash flow under control, begin to focus on long-range planning.

6.   Develop tight controls over billing and collections. To speed up cash flow, reduce the time between shipping your product and sending an invoice. Consider semi-monthly instead of monthly billing, and send second notices more quickly. Talk to your banker about ways to speed up collections; inquire about lock boxes, wire transfers, pre-authorized checks, and electronic trade payments. And don’t overlook a sure-fire, low-tech system: open your mail everyday, and deposit the checks.

7.   Plan the payment of your bills. Analyze all discounts, and refuse a discount only if the amount that you will earn on the cash by delaying payment is greater than the amount of the discount. Pay all non-discount bills as late as possible without jeopardizing your good vendor relations. Cash should be transferred from savings into your checking account at the rate necessary to cover checks. If a large amount of excess cash ends up in a low-interest account, transfer it to a higher-return account by the end of the day.

8.   Eliminate weekly paychecks. If you currently pay your employees weekly, perhaps they would be willing to accept biweekly or even monthly payment with mid-month advances.  The advantages to you: longer use of your cash and less frequent payroll tax deposits.

9.    Re-evaluate company practices. If certain customers are always late paying their bills, consider dropping them. Look for new business that will help your company’s cash flow, instead of focusing only on increased sales. Consider leasing assets rather than buying them.

10.  Look ahead. Develop a written cash flow plan and follow it. Finally, maintain an adequate line of credit and a good relationship with your banker.

You can read this article and you can do nothing, and nothing will change. But if you take action on these one by one, you will dramatic improvement in your business. I guarantee it.

There are hundreds of businesses in central Indiana in this predicament, so I decided to do a little research and come up with some guidelines of what it takes to get the attention of a lender in this “NEW” economy.

• Credit score of the owner of 720 or better.
• Decent payment history with vendors
• Debt service coverage ratio of 1.25:1.
• Debt to worth ratio 2:1 or lower
• A history of profitability
• At least 2 years in business
• Accurate financial statements

PROFITABILITY is the primary ingredient that impacts 5 of the 7 requirements listed above. In any economy, it is critical for management to keep focused on profitability. It is critical that the company work to a profit plan. It impacts if the owner gets compensated adequately and regularly; it determines if vendors get paid in a timely manner; it is one of the largest components in cash flow; it grows equity (which impacts the debt to worth ratio); and the longer the history of profitability, the more likely the company is stronger financially and as an added bonus – worth more.

And lastly, a word about accurate financial statements – although this seems like a no-brainer; it is a problem with many companies. Financial statements are the report cards that everyone outside your organization evaluates to see your performance as a manager.  If the information is inaccurate, it reflects negatively on your ability to run your company.  Accurate statements prepared on the “accrual” basis are the first step in managing a company well and getting your bankers trust.