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Shah: How to improve cash management for your small business
Navin Shah
Navin Shah

To be successful, your company must control expenses, maximize profit margins, and build up its cus­tomer base. However, often the big­gest challenge is cash management – namely, the movement of money in and out of your business.

That’s because “cash flow” deter­mines your ability to pay bills and employees, to handle emergencies, and to seize unexpected business opportunities. Cash flow reflects how valuable and vibrant your business is -- and when you apply for a business loan, your banker uses cash flow to determine your ability to repay.

So how can you increase your cash flow? Here are some tips to consider:

• Review debt - Pay off or pay down debt. For example, when your business is doing well, pay more towards principal to reduce a loan. Another option is to refinance existing debt so your loan term is longer and your payments are lower.

However, remember that refinancing can reduce the “loan to value” ratio and a bank may choose to call a loan below a certain level of debt coverage, which typically is 1.25 right now. Be sure to check the fine print of your loan documents.

• Reduce inventory – Buy and maintain less inventory. Also get rid of items that are not selling well, even if you need to do it at a discount.

• Negotiate terms with vendors - Keep your cash longer by arranging payment terms of 30 days or longer with your suppliers. Conversely, pay your suppliers quickly if they are willing to give you a reasonable discount as incentive.

• Set payment terms with customers - Get your mon­ey as soon as possible by sending out invoices immediately when work is completed or goods are delivered. And ask for prompt payment; don’t extend terms of 30 or 60 days.

You can also accelerate deposit of payments into your ac­count by arranging with your bank for a lockbox or electronic payment processing. The benefits of these services typically off-set any fees involved.

• Arrange line of credit with your bank – It will be available during emergencies to help you cover short-term cash needs, from a few days to a few months. Any loan charges from your lender are almost always going to be less than the late fees from your vendors.

• Have a collection process -- Don’t be so busy making new sales that you forget about receivables owed to you from past sales. Until you are paid, customers are using your money.

• Require a down payment -- This ensures that customers, not you, are funding a purchase, especially if the products are custom-made or special order.

• Increase revenue – Strategies include limiting all purchas­es to cash or credit cards; reducing credit allowances or dis­counts; and avoiding sales made on credit terms.

Another strategy is increasing prices. This scares many owners, but you have to experiment with pricing to deter­mine how much your customers are willing to pay.

• Sell receivables - You can inject immediate cash into your business by selling your receivables to a third-party finan­cial company instead of waiting 30 or 60 days for payment. Under this service, called “factoring” or “accounts receivable financing,” you receive the amount of the receivables minus a fee, which typically is 20 to 25 cents per dollar.

• Lease, don’t buy – Leasing can be more expensive than buying, but it allows you to pay in small increments, which leaves more cash for day-to-day operations. An added ben­efit is that lease payments are usually fully tax-deductible. A variation to investigate is a “lease with option to buy” plan.

• Review tax strategies – Like it or not, the government is a partner in your business and that means all taxes must be paid on time, in full. Failure to comply can mean severe con­sequences, financially and legally. There are no exceptions.

Also, consult your accountant about possible tax deduc­tions and credits such as for developing or renovating cer­tain types of real estate; for creating jobs among special target or disadvantaged groups; or for accelerating depreciation of designated equipment and property.

• Form buying cooperative – Find companies who can join you in buying certain non-competitive supplies in bulk, so you can benefit from lower prices and higher discounts.

• Maintain a “rainy day” reserve – Always keep one month of expenses in your checking account. And occasionally “stress test” your business by imagining the amount of cash reserves you would need if income went down for a pro­longed period, such as by 25% for three months.

• Reduce draw -- The less dollars you take for yourself, the more money is left to pay bills and to grow the business.

In business, “cash is king” so improving cash flow will help your business operate more efficiently and smoothly – and it will increase chances of approval for your next business loan application!

Navin Shah is chairman of Royal Hotel Investments, which owns and operates two hotels in Covington and one in Conyers. He is also vice chairman of Embassy National Bank, a commu­nity bank in Lawrenceville that he helped establish in 2007 and has become one of the leading SBA “Preferred Lenders” in the southeast. He can be reached by e-mail at