Healthy cash flow is essential to the success of a small business. You may have the best service or product around, your employees and customers may love you, your office may be well organized, but if you don’t have the money to buy inventory or pay bills, you can’t keep your business running. Many business owners make the mistake of believing cash flow is largely out of their control. On the contrary, the following steps can really help.
1. Analyze your financial condition
Financial analysts, credit providers and knowledgeable investors rely heavily on financial ratios to judge the health of a company. You should use these tools as well. Commonly used ratios can help you analyze your pricing strategy, level of overhead, liquidity, the health of your cash flow, your average collection period, the appropriateness of your collection terms and your inventory turnover rate.
2. Improve your cash management
When it comes to the cash flowing through your financial accounts, your goals should be to ensure that incoming funds spend as much time as possible earning interest or dividends for your benefit and that outgoing funds are available when needed. With a traditional business checking account, meeting these seemingly simple goals can be a complex task. You will have to move funds manually into a separate money market account in order to earn interest or dividend income and back into your checking account to cover disbursements when due.
An alternative is a central asset account, which combines traditional checking features, investment and borrowing into a single account. A central asset account saves you time and effort by automatically putting your cash where it needs to be, when it needs to be there. And by keeping your cash in interest-bearing accounts right up until the moment disbursements clear your account, a central asset account can also help increase your return and your bottom line.1
3. Even out temporary fluctuations
No matter how efficiently you manage your cash flow, there may be times when your business needs more money than it has on hand. This is why adequate credit resources are essential. A business line of credit is useful and convenient because it can be used as needed, paid down and reused without reapplying. When a line of credit is integrated with a central asset account, credit is automatically accessed when needed. And incoming funds automatically go to pay down your loan balance, reducing borrowing time and interest expense.
Although part of your business capital needs to be liquid, most businesses have some capital that can be invested in short- and intermediate-term securities for potentially higher yields. A broad array of investments can be purchased within a central asset account. And you can sell securities in your account at any time, or, if appropriate, borrow against their value2, to meet working capital needs. Be sure to discuss the risks of borrowing against your securities with your Business Financial Advisor.
Today’s business environment changes rapidly, and as a business owner, you need to regularly review your cash flow and cash management policies to ensure that they are helping to keep your business competitive.
1 Investments in money market funds are not insured or guaranteed by the FDIC or any other government agency. Although money funds seek to preserve the value at $1 per share, it is possible to lose money by investing in money funds.
2 Borrowing against securities may not be appropriate for everyone and should be carefully evaluated before being used. If securities decline in value, you may be required to pay down the loan or deposit additional securities as collateral. If you cannot do so, all or a portion of your collateral may be liquidated and the proceeds used to pay down your loan balance. A forced liquidation could also trigger a potential taxable event.