In a time when it seems the government is giving cash to every large mis-managed business in the country, it is frustrating as a small business CEO trying to get more breathing room on our credit line and are told no because the credit markets are in disarray. We didn’t create this problem, but its not going away so we WILL have to figure out how to deal with it. There are a few things that we have instituted at ForeSite which have helped dramatically which might help you too.

Determine your receivables formula
The first thing you have to do is figure out how you can forecast cash receipts for the future. It is easy enough in a program like QuickBooks to run an average days to collection report, but there is more to it than that. You must then take that number and track it back to your sales to figure out on a weekly basis what you can expect to come through the door. The model we use in a rolling 13 week cash flow spreadsheet is the following:

- If sales 4 weeks ago = 0
- Return average last 6 weeks cash receipts
- Else If Cash Receipts Known < Avg Sales 4-5 weeks ago
- Return Avg sales from last 4-5 weeks (average collections have been 31-33 days)
- Else
- Return cash receipts known

This model has proven to be fairly accurate over time for ForeSite understanding that is is only a model.
Once you have projected your cash flow, you can do some things to try to improve it:
1) Take credit cards - It is worth the 3% transaction fee to have your cash now. That is a lower rate than you will pay to borrow it.
2) Do credit checks on your clients - if their score is below 700, you should probably reconsider whether or not you want to give them terms.
3) Use a collections company - Sometimes the simple threat of being sent to collections will get you money you had mentally written off long ago. Try a company like Trans World Systems who offers to send letters first to try to collect before they take a percentage.

While this is certainly not an exhaustive list of preventative tasks, they have helped us manage our cash flow issues and make our credit line last an additional year during a time of business growth for our company.

This entry was posted on Tuesday, January 27th, 2009 at 12:40 pm by Michael Giuffrida and is filed under Accounting, Operations. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.