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Tips To Avoid A Cash Crunch: 3 Ideas For Cash Flow Management

Tips To Avoid A Cash Crunch: 3 Ideas For Cash Flow Management

Cash flow is an important element of any small business. To effectively manage your cash flow, you need to be aware of all the aspects that can affect it and how they impact your business. The best way to achieve this is by understanding what might cause fluctuations in cash flow and coming up with solutions ahead of time for each negative event so as not to be caught off guard if one occurs. This article will discuss some common factors that may reduce or increase your company’s cash flow and provide tips on how to handle crunches when they arise.

What is Cash Flow?

In quite simple terms, cash flow is the money flowing in and out of your business each month. Small businesses need to strike a balance between accounts payable and accounts receivable to ensure that more money comes in than goes out each month. Although cash flow is related to net income, they have some key differences. 

Net income refers to the earnings of a business during a period after considering all expenses incurred during the period. Net income includes sales recognized but not collected until subsequent months. In addition, net income likely includes a monthly depreciation charge which is a non-cash item. These are important to consider when comparing net income to your operating cash flow.

Why is Cash Flow Important?

Understanding how your business generates and uses cash can help you better navigate the growth of your company. Analyzing your cash flow helps you see how well your business is performing and how much liquidity your business has. 

Having cash on hand puts you in a better financial position, adds stability, and gives you better purchasing power. Your cash flow determines how quickly you can expand your business. Additionally, having positive cash flow that leads to a surplus makes you a worthwhile investment for banks or investors. 

maximize cash flow

Tips for Boosting Your Business’ Cash Flow

There are so many things you can do to keep your business running smoothly.

You should have a plan for every day; when the unexpected happens, you should be able to react. There are three areas to focus on for boosting cash flow.

Increase Revenues

  • Keep an eye on customer retention rates, customers are the backbone of any business, and if you have a low customer retention rate, it is time to look at what is going on. Customers are the lifeblood of any company. They provide the revenue that funds your business, and they keep you in business. 
  • Find out what is lacking in the market and offer new products and categories to augment your current offerings. You may be able to charge a higher price for new or improving on existing items.

Decrease Expenses

  • Reach out to new suppliers or renegotiate prices with an existing vendor. Even offering to pay early could result in getting a small discount, which is almost always worth taking.
  • Find ways to automate, or even outsource, parts of your operations. 
  • Find less expensive suppliers that have nothing to do with the product you sell. You do not want to sacrifice product quality for a lower price since this affects your image and reputation in the market. Focus on costs such as office supplies or a less expensive insurance provider. 

Operational Efficiency

  • Be open about what your cash flow is like with your team. They will need to know what is going on if cash flow is already tight or if it becomes tight. They can help your business quickly find ways to cut expenses or reinvest profits into projects with high rates of return.
  • Find ways to increase your return on assets. Smart business owners track their return on assets because it reveals how effectively you are investing in your business.
  • Manage inventories through buying more efficiently or increasing inventory turnover. When you buy efficiently your customer is the focal point, which makes it easier to make more sales.

 

An interesting observation by the Italian economist Vilfredo Pareto helps explain how best to manage cash flow. He noticed that 80 percent of the land in Italy was owned by 20 percent of the population. He further noticed that it happened in nature in that 80 percent of the peas in his garden were produced from 20 percent of the pods.

What does this have to do with cash flow management? Look at your business: it is likely that the Pareto Principle, also known as the 80/20 rule, is in play. Do 80 percent of your sales come from 20 percent of you customers? If so, it might make sense to cut out some of your more high-maintenance, low profitability clients. Your ratios may be different but understanding roughly 80 percent of an output results from almost 20 percent of an input gives you a competitive advantage on where to look to focus your effort and resources. 

By keeping an eye on your expenses, income, and operational efficiency you can predict when you might need a little extra cash coming in or going out. You can even use a budgeting tool to help with this process. You will see how much money is coming in each month and where all the money is going out each month, so it is easy for you to make changes if needed.

De-Risking a Business to Drive Enterprise Value

De-Risking a Business to Drive Enterprise Value

As an appraiser of every type and size business, my experience and training has helped me develop several key defaults to value, the biggest of which is as follows;

 

Value is driven by three key inputs; risk, growth and cash flows

 

In other online forums and presentations, I’ve represented this truth as a three-legged stool that provides structure and support to an opinion of value for tax, financial reporting, planning and strategic purposes. I’ve explained that the relationship between these three inputs is a simple one based on the direction of the input (with all other inputs unchanged) directly correlated to an increase in  value, in this case, an increase where;

  1. Risk – The lower the risk the higher the value;
  2. Growth – The higher the growth, the higher the value; and
  3. Cash Flows – The higher the cash flows, the higher the value.

I believe that any business owner or individual with some finance background can understand how an increase in growth and cash flows increases the value of a business.  In this blog, I want to talk specifically about how risk impacts value and how a company or business owner can lower or mitigate risk (i.e. “de-risk”) to increases value.

The easiest way for me to explain de-risking is to discuss the concept of insurance.

“Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses.”

In the case of a business, an owner/operator who is vital to an organization puts his/her business at considerable risk every day he/she walks out of the office. A bus, heart attack or accident can be a fatal blow to the owner but also the business. To protect against this loss, the company helps mitigate this risk through Key Person Insurance where the beneficiary is the business and the amount of insurance is at or above the value of the business or the determined impact that person has on the business.

While key person risk is one that can easily be mitigated through insurance, other risks are more difficult to lower or eliminate. Below is a list of risk factors that I believe any business has to manage. Each risk has a “de-risk opportunity” that management can consider in mitigating this risk.  Their ability to de-risk the business through operational and strategic initiatives or investment help the business drive value by lowering its overall risk. And, based on the simple math above, lowering risk increases value.

 

 

Risk Factor Rationale
Industry Risk

Industry risk is associated with the market in which the company competes and how volatile it is compared to the overall market.  Consider the recent pandemic and two industries; grocery stores and restaurants. One was considered essential (grocery stores) and the other was shut down (restaurants).

De-Risk Opportunity: The best way to mitigate or de-risk the business for this factor is diversification. Restaurants who survived the pandemic used delivery and to-go opportunities as a way to diversify its business model.

Execution Risk

Execution risk is based on how well the company has performed in the past in meeting its budgets (top and bottom-line metrics) and the overall strength of the management team.

De-Risk Opportunity: A company can hire specialized personnel to help fill holes in the management team. Other opportunities include building out the board of directors or creating an advisory board to provide checks and balances and accountability.

Technology Risk

Technology risk is most commonly associated with technology tools that lead to higher efficiencies and productivity.

De-Risk Opportunity: Along with hiring specialized personnel, the company can invest in software tools to help with financial planning, manufacturing, point-of-sale, and other programs that can turn hard data into management tools and dashboards.

Supply Chain Risk

In a post-COVID recovery, the term “supply chain” is now the catchphrase for defining risk associated with low to no supply of products and the delay in getting available products to the end-user. That Peloton bike is now six weeks out instead of four because they are having a problem securing the video screens from China…

De-Risk Opportunity: The best way for a company to de-risk supply chain issues is adding additional suppliers to the mix and increasing its inventory when it can to add a few months of extra supply to combat extended turnaround times.

Customer Risk

While retail stores have minimal customer concentration, a construction firm and government contractor may have 70% of its business with the Department of Defense.

De-Risk Opportunity: Diversification in both product and service offerings allows for any company to manage this concentration risk by focusing selling efforts on new industries or new customers.

Integration Risk

This risk is associated with an expected change of control or selling the business. There may be issues with transferring licenses, key contracts (see above) management transition of key people.

De-Risk Opportunity: Overall, this risk is highly correlated all of the others above. For owner-operated companies, putting together an operations manual that defines management roles and outlines key responsibilities will help eliminate “key person” risk. In selling a company, that risk may only be mitigated through consulting agreement that keeps the prior owner or top management in an active or shadow role or involved with a minority equity stake (as is the case with private equity purchases and “rollover” equity that allows the seller to participate again in another sale of the business.

What Does This All Mean?

Focusing on and managing these company-specific risks prior to an exit event will help increase the value of the business and provide the eventual buyer with a stronger basis by which to run the business going forward.  Think about it as a homeowner de-risking the sale of their home by renovating the kitchen, replacing the roof or cleaning up the landscaping and curb appeal. While all of these activities involve an investment (some more than others) the eventual return should come in the form of a quicker sale with more potential buyers which correlates with a higher sale price that, almost certainly, will exceed the cost of the investment.  The same is true with your business; there will likely be a tradeoff of value in de-risking the business through an increased cost structure (insurance, technology tools, increased staff). Remember, a decline in cash flows equates to a decline in value. However, the real challenge for management is to either eliminate other, more marginal costs and/or find leverage in these incremental costs to increase revenue and profits.

Exit Strategies values control and minority ownership interests of private businesses for tax, financial reporting, strategic purposes. If you’d like help in this regard or have any related questions, you can reach  Joe Orlando, ASA at 503-925-5510 or jorlando@exitstrategiesgroup.com.

How to understand your balance sheet: A beginner’s guide

How to understand your balance sheet: A beginner’s guide

A balance sheet is a financial statement that provides an overview of the company’s assets, liabilities, and equity at a specific point in time. It is important to know what each one means in order to understand how well you’re doing. It can be difficult to understand all the information on this document, but there are ways to break it down into more manageable pieces.

 

What is a balance sheet?

The balance sheet is a financial statement that provides information about the assets, liabilities, and equity of a company.

The first section of the balance sheet lists the assets on hand. Assets are anything that can be turned into cash. Assets include cash, accounts receivable (money owed to you), inventory (goods waiting to be sold), and prepaid expenses (e.g., insurance that is paid annually in advance). Assets are usually broken up into short-term (less than one year) and long-term (one year and longer)

The second part lists liabilities, which are things you owe money for. Liabilities include loans payable or due for goods purchased on credit. Like assets, liabilities are usually broken up into short-term and long-term.

Finally, equity is calculated by subtracting what you owe from what you own. This is also referred to as net worth or the net value of the business.

 

The importance of the balance sheet

Balance sheets are a snapshot of what a company’s assets, liabilities, and equity look like at any given point in time. A balance sheet is a tool that can be used to find out if a company has enough money to cover its obligations and stay afloat or enough assets to cover its long term obligations.

The balance sheet can also be used to determine how a company is financing its operations. A company that is generating enough net income will have higher retained earnings from one year to the next. A company that is financed through debt will have an increase in long-term liabilities year-over-year.

 

How to read a balance sheet

Below is an example of a balance sheet.

balance sheet

We already explained assets, liabilities, and stockholder’s equity. The balance sheet must always “balance” because assets equal liabilities plus equity (known as the accounting equation). Understanding this equation helps you understand a company’s position. If the company has more liabilities than assets, then it will have negative equity, which is a potential major red flag especially with mature businesses.

Investors and creditors like to determine a company’s financial health using something called ratio analysis. To determine how liquid a company is, divide current assets by current liabilities. In the example above, 67,500 / 34,200 = 1.92. Whether that is good or bad depends on the industry. In general, anything near or over 2.00 is acceptable.

Other performance indicators include solvency ratios (also called financial leverage ratios), profitability ratios, efficiency ratios, and coverage ratios. Corporations also have market prospect ratios which are used to predict performance, which is imperative when valuing a company’s stock price.

 

How to use information from the balance sheet to improve your finances

Did you know the information found on a balance sheet can also be used to measure your company’s vulnerability to risk? A complete balance sheet includes key pieces of information like cash on hand, accounts receivable and inventory. By analyzing these numbers, you will be able to see where your business is strong or weak in relation to other companies in similar industries. If there are any areas for improvement (i.e., too much debt), it will allow you time to prepare so that when the unexpected happens.

If you want to take control of your finances and improve them, the balance sheet is a good place to start. Understanding what it includes and how to read one will provide insight into where you can make changes in order to get more money for yourself or avoid unnecessary expenses that are taking too much from your paycheck.

The best way to use this information is by comparing two different months side-by-side on paper so that you have everything at hand. Once you have done this, focus on adjusting only those areas which seem most important – like lowering debt payments or reducing inventory on hand – and see if there is an impact in your bottom line!

The balance sheet is a powerful financial tool that can be used to improve your finances. It’s important for you to understand how the information on the balance sheet works and what it means in order to make informed decisions about improving your money management skills. Let us know if we can help! Contact our team of experts today and let them show you how they have helped others grow their wealth with remarkably simple math.

Financial Forecasting 101

Financial Forecasting 101

If you’re a business owner or been thinking about opening up a new venture, the thought of improving its performance must have crossed your mind. And that’s where financial forecasting comes into play. 

It’s simply the process of looking into the future of your business based on historical data and trends. In this post, you’re going to learn the basics of financial forecasting and how it can help you.  

What is Financial Forecasting?

The definition is literally in the name. Financial forecasting is forecasting a business’s financial status. 

More specifically, this is the processing, predicting, and estimating the future performance of a business based on current data at hand. Company revenue is used as the benchmark in most basic cases. 

The sales figure can say a lot more than how much profit your business made. Those data sheets are effectively a portal to your business’s future. But it takes a different set of capable eyes to capture the essence. 

Apart from the current sales figures, historical data is also used in financial forecasting. It helps analyze the performance with regards to the past, present, and hopefully a better future. This method is widely used by successful CEOs and entrepreneurs around the world for its accuracy. 

Why is Financial Forecasting Important?

Any business with long-term objectives can definitely benefit from this process. It also helps to set new standards for the business as well as guide the decision-making process. 

Another very important reason why entrepreneurs use this process is to convince investors. 

Suppose, you own a winery and you wish to expand across different states. You know it will be a successful venture. But how do you attract more investors? 

That’s where financial forecasting comes to play. You can accurately determine the future of your winery by considering all the variables in your current model and projecting them into a future scenario. 

CEOs love this model because it can bring important insights such as how to spend business resources, what the industry holds for the future, how long the debts will hover over the business, how to pay the shareholders, etc. to light. 

And when you have at least an idea of what you’re diving into, making the right decisions at the right time becomes a lot less burdening to your shoulders. 

Types of Financial Forecasting

When venturing into the dynamic world of forecasting, you should know about the types as well. There are two major branches of forecasts. One is Qualitative while the other one is Quantitative. 

Qualitative Forecasts 

Qualitative financial forecasting does not rely on computers to analyze large data sets. It’s quite an unorthodox way of finding out the connection between events. Rather than following the sales figures, Qualitative Forecasts focus on decisions taken from experience and intuition. 

It starts with gathering opinions from major positions in each department. Analyzing their insights might be crucial for forecasting.

The next step might be taking a similar scenario from a different environment and projecting it onto the subject scenario. 

The Delphi Method is another important aspect of financial forecasting. It indicates that company professionals fill out a questionnaire. Based on it, another questionnaire is created and filled. Now, these are combined and presented to the participants to re-evaluate their answers. 

Scenario forecasting is another great method. The person tasked with the forecasting will project different results based on the consequence of scenarios. Your management team has the freedom to select any result you want. 

Quantitative Forecasts 

Unlike qualitative forecasts, quantitative financial forecasts solely depend on large historical data sets. These are used to find patterns and trends in the business space. These forecasts are more accurate in sectors where numbers speak louder than legacy. 

Pro-Forma Financial Statements is a great method used in this forecast where the sales data from the previous years are used to make the prediction. 

Another method is Time Series Analysis. For short-term goals and objectives, this the perfect method to use. It involves collecting data for a certain period and analyze it to find trends. 

Lastly, the Cause-Effect method dictates that every effect on the business is related to the cause. The consumer’s income, their confidence in the business, unemployment rate, etc. directly influences the sales figures. The goal of this method is to find the connection.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

Protea Conversations – Rachel Martin

Protea Conversations – Rachel Martin

Protea Financial was founded in 2014 to provide high quality out-sourced accounting at an affordable price.  Given Protea’s flexible work environment, the Company especially appealed to accountants who wanted to re-enter the work force after taking time off to start a family. This allowed Protea to attract extremely talented individuals who were overlooked.  Over 80% of both Protea’s leadership and accounting teams are women.

We selected the name Protea because is the national flower of South Africa and is a symbol of our connection. The Protea flower has become an ornamental flower because of this striking beauty and is included in arrangements and bouquets as a symbol of courage or daring to be better or a sign of positive transformation.

Protea Conversations focuses on successful woman in business and their achievements.  The hope is that these conversations will create a forum to discuss the experiences, opportunities, and challenges women face, and how we can build a more diverse, inclusive, and successful environment for everyone.

In April 2021 we spend time with Rachel Martin. A unique combination of education and experience brought Rachel Martin to launch Oceano Wines with husband and co-proprietor, Kurt Deutsch in 2016. A Virginia native, Martin was present at the inception of what is now considered one of that state’s premier wine producers, Boxwood Estate Winery, in 2005. As Executive Vice President of Winery Operations, Martin’s job was to oversee all facets of production, sales and marketing of Boxwood’s award-winning whites, rosés and Bordeaux-style red blends.

Appreciating the distinctiveness of Middleburg’s terroir, Rachel spearheaded the move toward securing a coveted American Viticultural Area designation from the Alcohol and Tobacco Tax and Trade Bureau, the federal agency charged with evaluating the merits of all such applications. The petition she authored on behalf of the region was approved in 2012, making Middleburg Virginia the state’s seventh AVA.

Rachel’s forward thinking led directly to Middleburg having its own wine identity separate from the more generic Virginia designation, making her well suited to again start from scratch with Oceano Wines. None other than the esteemed author Jancis Robinson noted Rachel’s marketing savvy in her book “American Wine.”

Rachel is a member of Les Dames d’Escoffier International New York and Washington, D.C chapters and was the first woman to be inducted into the District of Columbia chapter of the International Wine & Food Society. Rachel was a founding board member of the Middleburg Film Festival where she was closely involved with the beverage/culinary. 

How did you get into the wine industry and why did you decide to start Oceano Wines?

My path to the wine industry began in 2002. It was my step-father’s awesome and somewhat crazy idea to plant a world class vineyard and build a state of the art winery in Middleburg, Virginia- Boxwood Estate Winery. My position would be Executive VP in charge of all operations, so in advance I attended the Diploma program at the University of Bordeaux’s School in Enology in Bordeaux, France and studied Enology and Viticulture at Napa Valley College in Napa, California.

In 2016, while still a Boxwood, I visited Spanish Springs Vineyard just east of Pismo Beach on the extreme coast of San Luis Obispo County, California. I was so intensely struck by the vineyard terroir to produce unforgettable Burgundian varieties, I immediately contracted for 6 tons of Chardonnay. We hired industry veteran winemaker Marbue Marke to craft our first vintage in 2016. That was the first step in establishing Oceano Wines with my husband and business partner, Kurt Deutsch. And in 2018 we added Pinot Noir to our offerings. Our wines are made by Marbue in Napa.

 

What has been the biggest challenge you have experienced in reaching your current success (personally and professionally)?

Since I feel like I have had two lives professionally in wine, I can speak to both challenges in each life. At Boxwood Winery, my biggest challenge, personally was working for my step-father. He is very old-school when it comes to business, and it could be soul crushing at times. That said, I am incredibly grateful for the opportunity that he gave to me as Executive VP of his promising winery. That was the start of my life in wine. Professionally, I was challenged at every level. I had been responsible for logistics and creative projects in the past, but nothing of this magnitude. I had to learn all facets of the business by the seat of my pants. The only industry mentor that I had was our viticultural consultant, Lucie Morton. That was amazing, but I was responsible for much more than that. I had to grow in every direction to meet the requirements to run winery operations, sales and marketing. It was a huge job, but very satisfying!

With Oceano Wines, there are not any personal challenges. It is like breathing, because I am literally living my best life. I am at my happiest when I am creating. We are sourcing from an incredible vineyard site, Spanish Springs, which is owned by our family friend Henry Warshaw. I am privileged to work with our winemaker, Marbue Marke. He is highly experienced, down to earth, professional and most importantly, expertly skilled as a winemaker and a viticulturist.

Professionally, since we are sourcing fruit from the extreme coast of San Luis Obispo County, making our wines in Napa as a client and I am based in New York City, we have not yet been able to establish a tasting room. This is the greatest challenge. We are looking into options on the east coast. Hopefully we will find the right opportunity in 2021. Right now, our wines can be purchased from our website and at restaurants and retailers in California, New York, New Jersey, Delaware, Maryland, Virginia, Washington, D.C., North Carolina and Florida.

 

What are your short term goals of your career/business and yourself?

Short term goals for business is getting our tasting room situation figured out and open in 2021. For myself, my goal is to continue my role as a leader and mentor in the alcohol beverage industry, by bring valuable content and support to my member associations: Women of the Vines & Spirits and Les Dames d’Escoffier.

 

What is the best piece of advice you have ever received that has helped you in your success?

Not everyone is going to like you, and that is okay.

 

What is the piece of advice that you wished you had gotten when you were starting out?

Approach people by what you can do for them, not what they can do for you.

 

What advice you give to others to help them be better leaders?

Cultivate and nourish your employees, they are your greatest asset.

 

As a thank you to our interview and Protea’s commitment to more diverse and inclusive leaders, Protea will make a donation to Vital Voices (https://www.vitalvoices.org/). Vital Voices Global Partnership is a global movement that invests in women leaders who are solving the world’s greatest challenges. They are “venture catalysts,” identifying those with a daring vision for change and partnering with them to make that vision a reality. They scale and accelerate impact through long term investments to expand skills, connections, capacity, and visibility. Over the last 22 years, we have built a network of 18,000 change-makers across 182 countries who are collectively daring to reimagine a more equitable world for all.