BusinessWeek Article Endorses
BusinessWeek article (shown below) has some excellent tips for small
businesses about managing cash flow.
One of the suggestions it makes:
It features an interesting case study about a
small Florida business explaining how
factoring kept them
MARCH 14, 2005
Beating The Cash Crunch
BW SMALLBIZ -- MONEY
How to take control of your cash flow
Ever since taking a
$1 million business improvement loan in 1997, Sophie and Roman Shor,
owners of Roman Jewelers in Flemington, N.J., had struggled. Sure, the
loan let them renovate their store. But it also saddled them with
$12,500-a-month payments. The Shors were forced to keep tapping into a
line of credit to pay their other bills. "It created a lot of stress,"
says Sophie, vice-president of the 35-employee, $5 million company. "We
were always borrowing from the bank, but it was important that we pay
our vendors on time."
After four years of this, the husband-and-wife team finally consulted a
financial planner. By improving their accounts receivable and taking
control of their debt, they were able to sharply increase their cash
flow and get back on track. The Shors have since expanded to a second
location, completed the renovations on the original store, and added
more profitable, higher-end jewelry lines. "Cash flow is the most
important thing in business," says CEO Roman Shor. "Without it, you
can't function. But when you have it, you can purchase the most modern
technology and get the best employees."
True, the nitty-gritty of tracking cash isn't very exciting. And few
entrepreneurs enjoy pestering customers to pay their bills. But falling
into the Shors' predicament is no fun, either. That's why it's essential
that even those allergic to budgeting learn the basics of managing cash
If you don't already have a system in place to monitor the cash coming
in and going out of your business, get started now. The next move is to
speed up collections by improving accounts receivable. Then, those who
like the ring of the phrase "found money" -- and who doesn't? -- should
consider cash flow strategies from managing debt and deferring taxes to
making sure your vendors are giving you the most for your buck.
Granted, few people start a business to become bill collectors, and it
can be uncomfortable asking customers to pay promptly. The solution is
to standardize the process, says Marsha G. LePhew, a CPA and certified
financial planner in Rock Hill, S.C. Set up strict guidelines for
billing and collection, then make sure your business is using some type
of accounting software to track payments. Spell out payment terms on
your bill so your customers are aware of your expectations from the
first sale. If you don't get paid on time, follow up immediately with a
second notice or phone call. "Do what you say you are going to do," says
LePhew. "If you slacken on your terms, they'll slacken too." And
consider getting cash in the door faster by offering prompt-pay
discounts of 1% to 3%.
If possible, make collections the primary responsibility of someone
else. Harvey A. Goldstein, CPA and managing partner of Singer Lewak
Greenbaum & Goldstein in Los Angeles, suggests hiring someone part-time
whose job is solely to collect. That person needs to be sensitive to
business relationships and a good negotiator.
If you're having difficulty getting bills paid on your own, you might
try using a factor. A factor will give you cash on your invoices in
exchange for a 7% to 8% cut or a monthly commission of 0.75% to 2%.
Collection is then up to them -- and out of your hands.
Broward Aviation Services of Pompano Beach, Fla., buys and sells
commercial airplane parts. So it needs plenty of ready cash to buy
before competitors do. That lets it get a better price, too. "If you
have cash, the deals come to you," says Timothy Pine, vice-president and
partner in the nine-employee, $7.5 million company. When Pine co-founded
the company in 1999, cash was tight and banks turned down his requests
for credit. Broward sold its receivables to a factor, GE Capital,
immediately receiving about 80% of their value and the rest as GE
collected from Broward's customers. Then Broward could forge ahead
without taking on venture capital. Plus, says Pine, "The banks won't
lend to you until you've built up a cash record.
Factoring allowed us to
Although you want to encourage customers to pay speedily, you'll benefit
by paying your own bills slowly. Just make sure you don't miss out on
any prompt-pay discounts yourself. Giving up a 1% or 2% discount so you
can pay 30 days later is the equivalent of financing those payables at
12% or 24% a year. Ouch.
Paying off debt quickly isn't always the virtue it appears to be.
Instead, better to manage your debt by matching the life of the asset
being financed with the term of the loan. That can mean spreading a
business mortgage over 20 or 30 years if you plan to stay in one
location, or taking a 10-year loan on a piece of equipment with a
10-year life span. "Why use up today's cash flow to do something that
will benefit the business over a period of years?" says Goldstein. "When
you have long-term assets, finance them over the long term." You'll pay
more interest over time, but if you use freed-up cash to invest in your
company, the trade-off may be worthwhile. You'll also shrink your tax
bill, as interest payments are tax deductible in most cases.
The Shors used that strategy to reap serious monthly savings. In
addition to their $1 million, 10-year business improvement loan, they
had a $2 million, 20-year business property mortgage. Their financial
adviser, Al Zdenek of Zdenek Financial Planning in Flemington, N.J.,
counseled them to focus on the terms of the loan and closing costs when
they refinanced. The Shors applied for a combined loan at three
different banks, telling each what the others were offering to get a
better deal. They landed a $3 million, 25-year loan with an interest
rate of 7%, compared with 8% and 9% rates on their previous loans. They
even got the bank to cut their closing costs to $35,000, down from the
$50,000 to $75,000 typical for a loan of that size. "If you're looking
for a sizable loan, you should go to two or three banks," says Sophie.
"We were surprised at the various options different banks offered."
Their monthly payments fell to $21,000 from $29,100, freeing up nearly
$100,000 annually. "The refinancing lifted a lot of stress and allowed
us to take the business in the direction we wanted to go," says Roman.
Taxes. Just the word is enough to set off groans. Still, there's plenty
you can do to lower today's tax liability, increasing your cash flow. It
may be in places you hadn't considered, such as benefit plans.
Contributions to qualified retirement plans are tax-deductible -- giving
you more cash now -- and the money grows tax-deferred until pulled out
at retirement, when you're likely to be in a lower tax bracket. Plus,
employees make pretax contributions to the plans, thereby reducing the
business' payroll taxes. Since starting a 401(k)/profit sharing plan in
January, 2000, Pine and his two partners at Broward Aviation have
contributed about $480,000 to their own accounts, deferring about
$148,000 in taxes in the process (assuming a 31% tax rate). Broward also
saved $17,400 in payroll taxes. "It's found cash," says Pine.
And while defined-benefit plans are going out of vogue at big companies,
older entrepreneurs and those who earn substantially more than most of
their employees -- the folks allowed to contribute more -- may find them
preferable to 401(k)s. Attorneys Mike Norris and Bruce Keplinger,
partners at Norris & Keplinger in Overland Park, Kan., changed their
company's 401(k) to a so-called safe harbor 401(k) plan in 2001 and
added a defined-benefit plan. Both plans let business owners make larger
contributions than traditional 401(k) plans in exchange for making
contributions to all employee accounts. Norris and Keplinger, who are in
their 50s, plowed a combined $215,000 annually into their plans,
compared with the $56,000 a year they together contributed to their
first 401(k). That let them defer $86,000 in taxes -- more than enough
to cover the $25,000 they contributed for the 10 employees of their $2
million company. Two years ago, the partners eliminated the safe harbor
401(k) to cut administrative costs and upped their contributions to the
defined-benefit plan. "It reduces our income taxes and allows us to
shelter substantially more money than we could with our 401(k) plan,"
Similar payroll tax savings can result from health insurance plans that
require employees to make pretax contributions. With premium-only plans,
often called cafeteria plans, employees use pretax dollars to fund an
account that helps cover their premiums for the insurance the employer
provides. A company whose 50 employees each put in $2,000 could save
$15,000 a year, assuming payroll taxes of 15%, says Robert Fox of
Suncoast Wealth Management in Tampa.
There's even room to maneuver when it comes to workers' compensation
insurance. Generally, businesses make up-front payments to cover
workers' comp for the year. Those amounts are based on the business'
wage base, job types, and sometimes previous claims. When John E.
Kosowski Jr. opened the Birch Street Garage in Cranston, R.I., in 2001,
he got quotes for workers' comp insurance of $10,000 to $15,000 a year,
including a hefty deposit. "It was insane. That was unaffordable for a
business like this," says Kosowski, whose company has revenues of about
$300,000 a year. He signed up for a workers' compensation payment
service in which payments are based only on actual payroll and paid
weekly, so there's no big up-front cost. Kosowski paid about $7,500 for
his five employees in 2004. "When you're paying weekly, you don't have
to beg, borrow, and steal to come up with an estimated payment and then
attempt to reclaim the unused portion. I'd never seen a refund for my
business," he says.
The flip side of improving cash flow by bringing in more money is
spending less. That doesn't have to mean scrimping. Instead, keep up
with frequently changing prices for telecommunications, utilities,
benefits plans, and other services. Charges for administering 401(k)
plans, for example, have fallen from $50 a person to less than $25 in
the past five years, says Anthony Leopizzi, a CFP at American Express
Financial Advisors in Harrison, N.Y. "If someone has an old retirement
plan, it really needs to be reevaluated," he says.
Daniel J. Friedman, a partner at Wealth Management Group of North
America in Farmington, Conn., says his company has changed telecom
providers five times in 10 years, saving about $5,000. That may not seem
like a lot, but "if you can save 10% to 15% by shopping your services in
three or four areas, it really adds up," he says. "And you're not living
any differently." Watching your cash flow may not be the best part of
being an entrepreneur, but it may be the best thing you can do to help
your business succeed.
By Virginia Munger Kahn
Freight Factoring & Small Business News from TruckingFactor.com