Follow these steps to ensure a clean balance sheet as the New Year dawns
While the steps needed to complete a year-end cleaning of a balance sheet aren’t terribly difficult, many company owners don’t tackle them because the owners don’t have the time. The result? The lack of balance sheet analysis nags at owners’ thoughts, preventing them from focusing all energies on the task of growing their businesses.
Balance Sheet Tip: Equipment
Take a tour of your facility, and identify those pieces of equipment long unused and sitting idle. They’re just taking up space, but should be generating income. You must find a way to convert these items into cash, by either selling them or having a service dispose of them. Once those pieces of equipment are gone, they come off the balance sheet. The difference between what you’re carrying on your books, and what you get back in cash for the equipment, goes into your profit and loss statement under “other expenses.”
Balance Sheet Tip: Inventory
Take another facilities tour, and this time look for inventory gathering dust. It could be a product you once manufactured, which didn’t sell as well as expected. Today, it’s filling valuable space and tying up your money. Get rid of it, gaining some cash in return if possible. The difference between its book value and the cash you garner goes into the profit and loss statement as a “other expenses.”
Balance Sheet Tip: Receivables
Many small business people believe they’re going to collect on long overdue receivables out more than 90 days. But if it’s not collectible, let’s write it off. It’s a bad debt, and it goes off of your balance sheet and onto the profit and loss statement as “other expenses.” Down the road, if the entity owing the money is able to forward you the long overdue payment, it will become “other income” in the year in which it’s paid.
Taking these steps will result in you, the business owner, being fully informed about what’s on your balance sheet. Your questions have been answered, and you have a higher degree of comfort than you otherwise would have about the veracity of that balance sheet. If you need help undertaking the process, don’t hesitate to get in touch with me.
I offer a 100 percent guarantee on my interim CFO work. I take on only clients I can help. Call me and let’s talk about your business. My phone number is 630-269-7646.
Read on to learn the common ways cash flow is mismanaged — and what CEOs can do about it.
An all-too-common source of trouble for small and mid-sized businesses is the failure to successfully manage cash flow. Cash flow is the lifeblood of a business, and if it’s not managed properly the company won’t survive for long.
What are the most common ways cash flow is mismanaged?
Cash Flow Mismanagement: Receivables
The trouble begins with failure to adequately manage receivables. When receivables get out of hand, running 60 days or more, your customers are using money that should be yours.
That cash flow failure in turn leads to trouble paying your own suppliers and vendors, who may respond by asserting that if they are not paid in a timely fashion, they are going to start shipping goods cash on delivery. The message from those suppliers essentially is, “We’re not going to be your banker.”
Cash Flow Mismanagement: Pricing Strategy
Cash flow management problems can also result from the inability to price your goods and services correctly.
In many cases, companies experiencing problems are under-pricing products and services. Even a tendency to slightly under-price can cause cash flow problems over time, as that slight differential inexorably builds up to a substantial cash flow shortfall.
Compounding the problem, this cash flow situation cannot be quickly rectified. The difference can’t be made up in one price increase, as it will likely be too much for customers to tolerate. Reviews of pricing must be tackled on an annual basis.
Cash Flow Mismanagement: Paying Attention to Margins
Companies tracking cost of goods sold, or cost of sales, must recognize those are direct costs — such as raw materials and subcontracts — related to sales. Accept a price increase from one of your vendors, and your margin has just been eroded. That can only be overcome by cutting costs elsewhere, or increasing pricing.
Whether you cut costs or increase prices will vary on a case-by-case basis, but either scenario presents obstacles. Most small businesses are hesitant to hike prices. But conversely, there are only so many ways you can cut costs.
If cash flow problems are not addressed, they will only fester and become even bigger issues. Typically, cash flow management issues result from inexperience. The business owner has no experience in analyzing cash flow problems. That‘s why it‘s important to either consult with a seasoned expert in these matters or hire an interim CFO. I’ve dealt with scores of companies with cash flow challenges, and have been able to counsel CEOs in making strategic financial decisions that have altered their companies’ fiscal trajectories.
Does your company have cash flow management issues? Let’s address those problems together, before your company’s lifeblood is drained.
Everyone knows that starting your own business is not a piece of cake, and sometimes, the pinch at the beginning happens again in the middle of your business’ existence, and again at another point in the future. What isn’t always discussed is ways to get through these rough patches.
Week 3: Accounts Receivable Factoring
This week’s topic, accounts receivable factoring, (also known as factoring, or invoice factoring) is one of the more complicated topics to understand, but is a very useful tool for up-and-coming entrepreneurs. Basically, it is the selling of the business’ accounts receivable to a third party, known as a factoring company, at a discount.
It’s time to brush up on some accounting terminology – accounts receivable is money owed to a business by its clients; an account of money owed to you. So in laymen’s terms, it’s selling your IOUs. If your business is short on cash and in need of an immediate infusion, it’s a highly viable option for getting yourself out of a pinch.
Happily, accounts receivable factoring companies are specifically set up to deal with these types of transactions and help you through a rough patch. The key to success with accounts receivable factoring is to select the right business partner with whom to work. It is usually better to go with a company that is well established, has stood the test of time and one that has expertise in the specific industry your business is in. AccountsRecievableFactoringHQ.com says “With the amount of complexity and nuances involved in various industries, teaming up with a partner who understands what you do will usually turn out better for your business. Ask the accounts receivable factoring company you are evaluating if they have a client similar to you in their portfolio. If you are a retail business, ask if they have other retail clients. Industry experience is a key factor in determining your success with factoring.” Keep in mind though, the age of the receivables has a significant effect on the amount the company receives; the older the receivables, the less the company can expect.
Have you ever looked into selling your accounts receivable? What information did you come into when searching? Did it seem like a good investment?