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Managing the Ins and Outs of Cash Flow

(July 2006) posted on Mon Jul 31, 2006

Set cash-flow goals and execute a plan to achieve them.

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By Marty McGhie

* Average Days Outstanding is calculated by dividing your total outstanding accounts receivable balance by the average daily sales. The average daily sales should be computed over a significant period of time, at least 30 days, in order to reflect a true average. This measurement will track the level of success you’re having in your collections.

* Accounts Receivable Turnover is computed by dividing your sales in a given period by the average accounts receivable balance (computed by dividing the beginning A/R balance plus the ending A/R balance of a given period by two). Although this ratio is calculated from a different perspective, it will also reflect how quickly you are collecting on your sales.

At my company, we have an employee dedicating at least 20 to 25 hours per week just dealing with accounts receivable. She sends out an e-mail each day to our managers summarizing total accounts receivable and breaking down the percentages of current, over 30 days, over 60 days, and over 90 days. This gives us a clear picture of the status of our accounts-receivable balance at any time.

Outgoing cash flow
Cash flow out of the business also requires careful planning and management. The highest priority in managing cash, of course, is your payroll. Make sure you always have cash allocated to pay your employees. As with all businesses, our company has endured some times when cash was very tight-but in the 13 years I’ve been associated with the company we have never missed a payroll. You might believe you have the most dedicated and loyal employees in town, but miss a few payrolls and they will be gone. In short, don’t spend your payroll money on anything but payroll.

Equally important is allocating cash to pay your payroll taxes. These are funds withheld from your employees’ checks -this is their money, not yours. Don’t make the mistake of robbing that particular "Peter" to pay anyone named "Paul." The IRS designates payroll taxes as "trust funds" and can hold any and all corporate officers 100% personally liable for trust funds not paid (no corporate bankruptcy nor personal bankruptcy will avoid these penalties). If you haven’t already done so, you may want to consider setting up a separate payroll account with your bank and transfer operating capital into that account to cover upcoming payroll and payroll tax expenses.

Other expenses of the business such as vendor bills can be a little more flexible in terms of their timing to pay out. Your

with your average days outstanding in accounts payable. If so, it’s best to communicate your intentions to your vendors, keeping them in the loop. If a vendor’s terms are net 30 and you intend to pay them at 45 days, call them up and let them know. Then, if you honor your commitment to them, they will continue to extend you credit and your long-term business relationship will not be jeopardized. It’s amazing how flexible people are when you commit to do something and then make sure you do it.

Although you probably won’t have that type of flexibility with utilities, rents, lease payments, and insurance premiums, that doesn’t mean they shouldn’t be in the cash-management plan. A weekly cash plan will include everything that is due that week in a snapshot report. Once you have determined your commitments, you can then prioritize your payments. As your cash comes into the business, you are then able to release cash out according to the priority agreed upon by your team. This will help avoid crisis situations. If the budgeted amount of cash inflow doesn’t arrive, then you have some damage control to do, but at least you know where to spend your efforts to that end.

Long-term success
If you don’t currently have the resources in your accounting department to get the type of information necessary to implement a cash-management plan, it may be time to consider the benefits of doing so-they will likely outweigh the costs. Whether you need to fine-tune your cash-management procedures or begin from scratch, continued focus on cash management will improve your business and contribute to your company’s long-term success.

Marty McGhie ( is VP finance/operations of Ferrari Color, a digital-imaging center with Salt Lake City, San Francisco, and Sacramento locations.