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Developing Cash Management Practices for Family-Owned Businesses

Many family-owned businesses put the concept of formal cash management on the back burner. Oftentimes the family business is too small to have a dedicated CFO, controller or other staff member to oversee cash management responsibilities, or the senior management team may not have seen the need for such formal practices if it has not faced a cash flow crisis. Additionally, family businesses are often limited by fewer business lines and less access to capital.

The best thing, however, is to establish specific cash management practices before a crisis, and to even stop a crisis from happening. This is a shift from a reactive crisis management strategy to a proactive cash management strategy. With the right tools and help, even the smallest of family businesses can develop strong cash management practices to ensure that it maintains the cash it needs to meet its financial requirements. Neglecting cash management can cause the family business to fail to meet its obligations, making it necessary to take drastic measures such as liquidating assets or filing bankruptcy.

Careful cash management practices can help your family business strike a perfect balance between growth and liquidity. While you need to use cash to invest in business growth through net working capital, you also need to stay liquid enough to meet your financial obligations.

Your family business’s cash management program should consist of cash cycle management, which is at the center of your cash management efforts; organizational integration and incentives to get your entire staff involved and motivated; and regular forecasting and review practices to help your management team stay ahead of the curve.

Cash Cycle Management

Managing the inflow and outflow of cash related to your family business’s accounts payable and accounts receivable is the most important aspect of cash management. As your business produces products, provides services and products, and is paid for those services and products, your business establishes a cash cycle. The longer your cash cycle – the time between outflow and inflow of cash – the more financing you may need. Shorter cash cycles give you faster access to cash. Smaller family businesses may be able to manage this process simply, while larger companies require more complex mechanisms. No matter what the size of your family business, there are several priorities in managing your cash cycle.

Establish Credit with Suppliers

As you first do business with your vendors, you may want or need to pay their first deliveries by “credit on delivery.” This can help your business build good financial relationship with vendors, allowing you to shift to longer payment terms later as you establish favorable credit. As much as your business is able, pay your vendors’ bills on time and only pay late after discussing an extension with the vendors to stay on good terms. If you do find yourself short on cash, utilize your vendors’ grace periods for invoice payments on a conservative basis – you may find that many offer you the time you need to pay after the due date without subjecting you to a penalty. Establishing good credit with suppliers is essential because those suppliers can become credit references for future suppliers.

Prioritize and Schedule

Sometimes you just don’t have the cash to pay everything on time. In this instance, prioritize the allocation of outgoing cash based on how critical the supplier is to your organization. And don’t forget that suppliers are often lower on the totem pole than other things like payroll and utilities. In times of crisis, you may also have to do things like suspend senior management payroll, or pay only parts of an invoice. Vendors would rather accept part of a payment than nothing. On the other hand, if you are in the position to pay an invoice early, doing so can provide you with desirable discounts, depending on your suppliers’ policies.

Manage Inventory

Small family businesses are typically not as adept and managing inventory levels as are their larger counterparts. But when your inventory levels are too high, that means you have tied up cash that may have been put to better use elsewhere. There are things you can do to manage your inventory, like adjusting production levels in accordance to your peak and off-peak seasons. You can also encourage your customers to carry or purchase more of your inventory in exchange for a discount. To ensure you are maintaining the proper level of inventory, conduct regular audits.

Collect on Accounts Receivable

The quality of your customers has a lot to do with your cash cycle. Avoid extending credit to high-risk customers, and even get rid of bad customers. In establishing any credit terms with a new customer, always check their credit, references and financial statements. The better you know your customers, the better you understand their ability to pay – and even their business cycles that may affect their own cash flow. As you get to know your customers better, you can adjust their credit lines and terms to ensure you have a financial relationship that is beneficial to you both.

Formalize a consistent collections policy for your family business that includes routing monitoring of aging reports that show you which invoices are overdue and an outline of various forms of contact, escalating contact schedules and the involvement of management, and a policy on when to involve a collection agency or to factor (sell at a discount) your receivables.

Access Short-term Cash

Obtaining a bank revolving line of credit, often secured by your receivables, offers you an affordable and flexible source of short-term cash when you need it. Sometimes this line of credit must be secured personally by your family business’s owner or president. Another option may be to use a personal credit card. While this may be expensive and put the personal cardholder at some risk, it can be a good alternative to have available in a crisis.

Stay in the Loop

Thorough management of the cash cycle involves personally signing all checks to ensure accuracy and to review outflows. Doing so can alert you to potential red flags and even fraud, but can also give you a wealth of knowledge about your business’s cash position. You should also actively manage your suppliers. This allows you to consider periodically whether your existing suppliers are adequate or whether it would be better to make a switch, such as to turnkey providers that may offer bulk discounts.

Organizational Integration

Cash management practices are most effective when your entire family business is integrated into the process.  Starting at the top, your board of directors, which are there to provide your management team with perspective and objectivity, can offer a wealth of insight into your cash management strategies. Someone on your senior management team should also be assigned, along with applicable support staff, to cash management responsibilities.

Have someone, such as a controller or accounting staff member, accountable for reviewing and managing your business’s cash flow. Even your purchasing managers should be in touch with your business’s cash position and have a clear understanding of how any outflow of cash may affect it. Other employees should also be empowered with decision rights regarding accounts payable and receivable so that your employees are not stifled by too stringent approval requirements.

Within your family business, you should have someone specifically assigned to the responsibility of collections. This person should monitor aging reports, call past-due accounts, handle invoicing, conduct credit checks and the like. Just as important, the employee you assign to these responsibilities should be assertive and organized.

An additional step to take to ensure that your entire organization works together toward effective cash cycle management is to devise an incentive plan for managers and salespeople. This incentive program can be based on a variety of factors, such as gross sales, net profits and other goals.

Forecasting and Review Practices

If rather simple cash management measures have sufficed throughout a family business’s existence, management may not consider forecasting and reviewing cash flow a necessary step – especially in those businesses that have a simple organizational structure. However, forecasting and reviewing the cash flow and its management can help your family business understand the business’s available cash versus requirements, prioritize its use of cash, find discrepancies and identify problems before they become critical.

Especially in times of significant change, such as expansion, forecasting can help you monitor your business’s cash position. Periodic reviews can help you identify trends and plan for the future. The knowledge base that comes from your forecasting and reviews should also be shared with staff members, who can work more effectively in response to the business’s cash position. Regularly discuss with your staff or key employees the uses and sources of cash, review your balance sheet and go over your income statement projections. Think of these open discussions as an opportunity to discover even more information and generate new ideas to further advance enhance your family business’s cash management practices.

Find more information on forecasting and projections in the following articles at Inc.com:

The Secrets to Formatting Cash Flow Projections – Tips for developing the tools you need to manage cash flow

Cash Flow Projections Made Easy – Step-by-step instructions on creating cash flow projections

Action Plan: Forecasting and Cash-Flow Budgeting – How to use forecasting to create a solid business budget

Contributing source: Inc.com

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