bie, a Santee, Calif., financial advisory firm. “Some companies find themselves in a position where payables come due sooner than receivables come in.”

This situation sometimes leads companies to borrow from one source to pay another. If a company relies heavily on credit cards or bank loans to shore up cash shortages, the resulting interest payments will eat into operating cash or reserves. Executives must examine investments in equipment and infrastructure while ensuring that they’re collecting from customers in a timely manner.

Although a growing number of SMBs use accounting packages such as QuickBooks, Microsoft Office Accounting Express, Microsoft Dynamics GP (formerly Great Plains), or Sage Software’s Peachtree for forecasting, many firms underutilize these applications and others remain mired in spreadsheets or paper. Without a system for tracking fluctuations in cash flow and understanding its impact, it’s impossible to make sound decisions. Winter says that the effective use of accounting software, along with clearly defined metrics, can help identify problems.

A focused strategy also goes a long way toward achieving success. At Phoenix-based Copper State Communications, a telecommunications VAR with 80-plus employees and approximately $10 million in annual revenues, President Steve Sutton conducts credit checks, requires deposits for projects, and demands payment before switching on any system. Otherwise, he says, “If there is some kind of hiccup along the way, the client expects you to provide a fix and refuses to pay. Soon, you’re two or three months down the road and still haven’t received a check.”

Sutton also pays vendors as close to the due date as possible, but makes sure he doesn’t step over the terms of the deal. “We will take actions to improve our cash flow, but not endanger our credit standing,” he says. Whenever possible, he also negotiates payment terms and discounts to optimize cash flow. “If we can get a 2 percent discount on 15 or 20 days, we will usually do that. We will rarely agree to 2 percent on 10 days. It just doesn’t work for us.”

Other executives have developed their own strategies. For instance, at Consolidated

10 TIPS
FOR MANAGING
CASH FLOW

1. Use a top-tier accounting pro-
gram for forecasting.
2. Establish metrics and bench-
marks to guide business processes.
3. Avoid a fixed salary for the prin-
cipals if the company is new.
4. Adjust payment terms and dis-
counts for prompt pay.
5. Bolster maintenance and service
contracts for a steady income.
6. Use sweep accounts as well as
dedicated depository accounts
for payroll.
7. Negotiate a larger fee up front
and reduce customer payments
on the back end.
8. Use credit checks and Dun &
Bradstreet reports to establish
a customer’s ability to pay.
9. Collect payment before switch-
ing on or modifying a system.
10. Avoid borrowing to cover ex-
penses; interest payments will
eat into cash flow and profits.

Technologies Inc. (CTI), a Port Chester, N. Y., reseller and integrator for voice, Internet, and data products and services, sales reps must abide by standard terms and conditions, and cannot overstep these rules without high-level authorization, explains President Kenny Heitner. Reps also don’t receive commission until the company collects on payments. CTI uses a dashboard application from 4-Profit to monitor performance and ensure that it is meeting established metrics.

CTI doesn’t stop there, however. The firm also addresses fluctuations in cash flow with ongoing maintenance contracts. “These accounts help us with profitability as well as cash flow,” Heitner says. Instead of working on a project for months and then getting paid, the company watches a stream of fees trickle in every month. “Rather than selling a product on a one-time basis for $50,000, we may sell a five-year solution for $100,000.

The customer receives a discount and winds up paying less overall, and we receive the working capital to operate more smoothly and predictably,” Heitner says.

Winter points out that some companies improve their financial standing by negotiating a larger up-front sum. Instead of a standard fee of one-third upon signing, one-third upon equipment delivery, and one-third upon completion, it’s sometimes possible to obtain 50 percent on signing and break the other two payments into 25 percent. “For smaller companies, it can help avoid the liquidity trap and problems associated with slow payments and industry downturns,” he explains.

BANKING ON IT

How a business approaches banking plays a role in cash management as well. A zero-bal-ance account often boosts operating cash and maximizes returns on the capital, for example. It sweeps funds into a savings account or applies them against an equity line—usually at the end of each business day. Another strategy is a dedicated depository account. Before each payroll period, a company deposits only the funds required to make the run. This helps avoid idle funds parked in a noninterest-bearing account while reducing the risk of payroll check fraud.

Kronenberg takes a holistic approach to cash management. He uses credit checks and Dun & Bradstreet reports to understand a potential customer’s ability to pay. He calculates the carrying cost for products and services and establishes credit terms that match the circumstances, and the risk, for a particular client. This might lead to leasing arrangements, discounts, and other forms of “creative financing.”

Kronenberg has also built managed services into nearly 30 percent of the business, uses e-payments to speed the receipt of funds, and constantly plugs operational data into software so he can make adjustments on-the-fly. “There is no single solution to managing cash flow,” he says. “It’s all about developing sound business practices and thinking creatively.”