At the same time last year, we had more cash reserves saved up in the money market account. And I know that last year the line of credit was paid off, while this year we’ve got quite a bit outstanding. Should I panic, or keep going forward?
Thoughts of the Day: There are several reasons that you could be dipping into cash reserves and the credit line. Set in motion a plan to get things back on track. Treat underlying problems as warning signs and fix them permanently.
This can be a good news/bad news question. Figuring out which can make all the difference in how the year unfolds for your business. Look for facts to validate or correct what you’re feeling.
Instincts can be useful but cash reserves need to be backed up with accurate information.
Check on factors that impact cash reserves: accounts receivable, accounts payable, credit card & other loan balances, checking account balance, pending orders, to name just a few. How is each of those accounts compared to last year? When accounts receivable is up that may be where the cash went. You’re waiting on clients to pay invoices. Or, when credit cards, loans, or accounts payable are down, you may be paying off bills and principal faster. Also, when business and orders are up, you may have a classic problem of cash flow drying up.
Let’s say accounts receivable is up, meaning money is owed by your customers. Check on why – how much is in current, 30-, 60-, 90-, and over 90 days past due. Reduce outstanding balances over 60 days past due. Getting paid gets riskier the further out the outstanding balances are from the time the client received their goods. Change your payment policy to the time of delivery.
Check the creditworthiness of all clients who receive credit.
Make clients shift to credit card payments, to put the risk on the credit card company. Clients that are over 30 days past due, insist on speaking with the person in charge of releasing payments and verifying that the outstanding balance is on their books, approved, and get a pending date of payment.
Build cash reserves. If the business activity is up, you may need to increase the size of your credit line.
You need a plan to cover the “cash stretch” period from the time you start ramping up to service additional client activity until the time clients make payments. Look at your exposure from additional hiring, equipment, and material purchases. Also, consider the time cash flow in from new client orders. Calculate the cash reserve amount you’ll have to float. Ask clients for deposits on new orders to lower your risk and cash outlay.
If credit card balances are down, but cash is tight, you may be paying off the credit cards too quickly. The same goes for a drop in a credit line or term loans outstanding. Watch for warning signs that things are not going well in the core business: Credit card balances are up. The line of credit is used up. You have more outstanding term loans. Cash is tight.
Check on profitability and break even.
Find out if you are making enough in gross profit to cover overhead and principal payments with money left over to contribute to savings. Unprofitable business is not sustainable or good for cash reserves. Address profitability problems immediately. Dump unprofitable accounts, scale back on overhead and find ways to improve productivity.
