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Do You Have a Cash Control Policy?

Some do's and don'ts to help your business cope with cash flow crises.

When a company runs out of cash, it’s a serious crisis. Usually what happens is things are going along quietly and then Accounting sounds the alarm — "Hey, we are about out of funds."

Common reactions include:

• Getting an emergency loan. For small shops, this usually means running a few bills on the owners’ personal credit cards.

• Obtaining “working capital.” That phrase is typically code for “an APR that is probably more than 40 percent.” Be leery whenever that phrase is the pitch. Unless you are positive you can make 40 percent on your electrical projects to repay this, it’s a bum deal. Find a lender with reasonable terms, and make sure you compare apples to apples. If you convert all offers to APR, you can make an intelligent choice; make sure you calculate the APR based on how much time you actually have to use the funds.

• Canceling training. If you find this choice has merit, then identify your high-potential people and know that probably most of them will soon be looking for another employer.

• Deferring purchases of needed supplies. Telling people to stretch their office supplies, foam ear plugs, and other low-cost items saves a few bucks, but is bad for morale.

• Take spending authority away from mid-level people. This simply gums up operations while insulting your mid-level people.

• Downgrading an intended purchase. For example, the power quality meter you really need costs $400 more than the one you settle for.

• Pressuring customers to pay their invoices now. Pressuring a customer isn’t generally recognized as a good way to build referrals or repeat business.

• Cutting advertising spending. Good luck maintaining revenue with this bright idea.

• Laying someone off. Is it right that someone who works hard should lose his or her job because the company management wasn’t doing its jobs correctly? What will your remaining employees think of this? Note that one common effect of crisis-based layoffs is that productivity takes a big hit not just because of lowered morale but also because of increased job search activities while on the clock.

• Slashing prices to raise quick cash.
Typically, the net profit is a negative number. So you go even deeper into the hole and signal to customers that you have been overcharging them and they can expect lower prices going forward.

You can avoid all of the angst and negative consequences if you develop the right cost-control policy. The policy guides your spending and collection decisions. You already know your customers won’t pay you upfront and your suppliers won’t give out interest-free 90 day loans. But something in between these extremes is realistic.

Below are some features your policy could include:

• To avoid surprises and thus emergency measures, ensure a senior manager or two reviews the balance sheet and cash flow report two days per week. The cash flow report should show projected cash flows based on known and anticipated expenses and incoming payments (not revenue) for at least 90 days. This reviewer(s), if finding an emerging problem, would alert other senior managers of what appropriate responses may be needed.

• Accounts receivable are reviewed weekly. All outstanding invoices are followed up on (customer gets a query or reminder) the week after being submitted and again a week before due, not only after they are two weeks overdue. One of the main reasons for cash flow problems is the overdue invoice. The first follow-up ensures it isn’t lost or in need of revision. The second follow-up alerts the customer that a bill is about due.

• Accelerate payment schedules. A big project can produce big profits, but if you don’t get paid until it’s completed you may have a cash flow crisis. One solution is to break a big project into smaller ones, each of which is billed separately. Another solution is to bill at pre-arranged completion milestones.

• Simply ask for terms. If you have a few vendors with whom you do a good amount of business, just ask for terms. You are almost certain to get some kind of accommodation. For example, suppose your company pays most bills with a corporate credit card. And the statement closing date is four days away. During those four days, ask each vendor if you can delay payment for five days so the charge goes on the next cycle. Make a note of those who deny the request, and shift your business to those who gave you terms. Or seek out new vendors who will.

• Generate a list of authorized adjustments to anticipated cash flow shortfalls. These can include surveying what outlays may be deferred with minimal effect on operations or morale. For example, ask a vendor for a small, temporary extension on payments. Or defer buying the new service van. Or get a bank loan. This list should not include anything that will negatively affect operations, safety, or morale. Try to keep it limited to temporary adjustments to meet a temporary situation. Canceling training doesn’t qualify.

• Generate a list of authorized adjustments to emergency cash flow shortfalls. If you’ve taken care of the other items already mentioned, it should never come to this. But if it does, tread very carefully.

With a good plan to control your cash flow, you should never experience a cash flow crisis. Waiting until a crisis occurs usually means you have no good choices and are forced to make a bad one.

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