Focus.com Publication on Cash Management

1. Best Practices for
Managing Cash Flow
February 2, 2011
topics: best practices expert content finance cash management cash flow accounting
Focus Research ©2011 All Rights Reserved

2. Best Practices for Managing Cash Flow
Best Practices for Managing Cash Flow
February 2, 2011
by Bob Dawson, Melinda Emerson, Susan Lannis, Robert A. Marchello, Veronique Palmer, Phil Simon,
John Warrillow
topics: best practices expert content finance cash management cash flow accounting
Executive Summary
SMBs and enterprises alike must manage their accounts receivable and accounts payable with the utmost
care. When cash isn’t flowing in, it simply cannot flow out. What are the best ways to manage your business’s
cash flow, so that you can collect and disburse funds while keeping your money working for you when it’s
in hand? In this guide, Focus Experts Bob Dawson, Melinda Emerson, Susan Lannis, Robert A. Marchello,
Veronique Palmer, Phil Simon and John Warrillow share their top 10 best practices for managing cash flow.
After reading this guide, be sure to check out the entire discussion and join the conversation:
http://www.focus.com/questions/finance/cash-management-best-practices-what-are-your-3-tips-better/.
Best Practices Checklist
1. Keep your expenses low as possible.
2. Get paid up front for your services.
3. Establish a realistic Accounts Receivable/Accounts Payable cycle.
4. Implement a cash-forecasting model.
5. Secure a line of credit for access to emergency funds.
6. Save for a rainy day.
7. Make your invoices as clear as possible.
8. Incentivize your customers to pay early.
9. Elicit customer feedback about improving your process.
10. Pick up the phone when it comes time to collect.
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3. Best Practices for Managing Cash Flow
Best Practices
1. Keep your expenses low as possible.
“Watch every cent going out. It’s all too easy to rush out and buy big-ticket items when you start a business and you get
your first big check. Don’t do it. Small businesses are only deemed successful and sustainable after five years. Cash flow
is a constant challenge in this time. Think about every single thing you buy. Buy office supplies in bulk to get better prices
and shop around for the best prices.” (Palmer)
“Many small businesses outsource everything. Don’t. For example, some companies hire firms to maintain every facet of
their website. Solution: Switch to WordPress for your website/content management system (CMS). There are others, but
WP is a very intuitive one. Webs and Nakea are two new ones with WISYWIG interfaces. You can then manage most of
your site independently. That way, your outflows drop, and you learn in the process.” (Simon)
2. Get paid up front for your services.
“Package your service like a product by naming it and branding it as if it were a product. We’re used to paying for products
up front and services after they are rendered. For example, you pay Costco for the toilet paper before you use it whereas
the last time you had your taxes prepared by an accountant, you paid the accountant only after you were satisfied with the
job they had done. Charge up front for your ‘product’ and you won’t have any cash flow concerns.” (Warrillow)
“Insist on cash up front or seven-days terms. Only take on clients who can accept these terms. It may be difficult to do,
especially when you’re desperate for business. But it doesn’t help getting that business and they don’t pay you. Explain
the fact that you are a small business and therefore the terms are what they are. Most (reputable) companies will
accommodate you. Don’t take more business from those clients who have not paid you in the past. It’s not worth it. If you
lose a client, find two good ones to replace them.” (Palmer)
3. Establish a realistic Accounts Receivable/Accounts Payable cycle.
“In order to insure that the company is setting itself up for a cash-positive situation, it must ensure that there is a large
enough gap in the time cash comes in and goes out. For example, having an A/R (Accounts Receivable) standard terms
of Net 45 and an A/P (Accounts Payable)terms of Net 60 with vendors may seem like it would be sufficient, but 15
calendar days is really not a lot of time. As a general rule of thumb, your customers will likely write the check on the due
date then mail payment as opposed to insuring you have it on that date so you are already cutting into the cycle by a
week.” (Marchello)
4. Implement a cash-forecasting model.
“Having the ability to manage and forecast cash for three, six or 12 weeks out is key to ensuring that the company
continues to fund its operations well. A simple Excel model can be utilized that takes into account Beginning Balances,
Reoccurring Payments (Op Expenses), A/R (adjusted for payment arrangements, A/P (adjusted), LOC Borrowing/
Repayments and allowances for miscellaneous items. I am sure there are many models and programs out there to
manage cash, but an Excel model is more than sufficient and is proven to work.” (Marchello)
Best Practices for Managing Cash Flow Focus Research ©2011 3

4. “These rules of thumb can help keep you on an even financial keel: You should live on about one-half of each payment
you take in because 30 percent will be taxes and 20 percent should be set aside for growing the business. To calculate
your fees, add up everything you want to spend in the business, everything you need to spend personally, add another 20
percent of that total because you always spend more than you think and then divide it by the number of hours per week
you can bill clients. Put 30 percent of every client payment into a savings account for paying quarterly taxes deposits with
a little left over, which builds the cash reserves for rainy days.” (Lannis)
5. Secure a line of credit for access to emergency funds.
“The goal of any cash forecasting/management process should be to never need financing, but that is not always a
reality. In the event that something occurs that was not predictable (external factor) it is crucial to have a plan of attack
with regard to financing. The current interest rates are very attractive for small business owners, so now is the time to
secure a line of credit, not when it is in the middle of a cash crunch.” (Marchello)
6. Save for a rainy day.
“Suzi Orman recommends having eight months’ salary saved up in case of emergencies. It’s just as important when you
have a small business. You never know what the market will do; make sure you have enough money to tide you over the
tough times. Even three months’ salary is better than nothing. It gets worse when you start hiring staff.” (Palmer)
7. Make your invoices as clear as possible.
“Make sure your invoice is clearly understood. Often times the amount of information (including marketing information on
some) creates a maze for the accounts payable person to be able to read and understand.” (Dawson)
8. Incentivize your customers to pay early.
“Develop an incentive for your customers to not only buy more from your company, but structure that incentive to include
points for paying their invoices within agreed upon terms.” (Dawson)
“Develop a discount incentive program for paying early. Please not do not discount for paying Net 30, that is what your
customer is supposed to do. Offer a 2 percent to 5 percent discount for Net 10 or Net 15 for your customers depending
on the amount of the contract.” (Emerson)
9. Elicit customer feedback about improving your process.
“Survey your customers’ account payable staff by placing a survey link or card in your invoice, and ask them how you can
improve their handling of your invoice for payment. You will be surprised how many responses you will get and also what
they think when they open your invoice.” (Dawson)
10. Pick up the phone when it comes time to collect.
“Start making collect calls at 30 days to inquire about the status of your invoice. Do not ever be afraid to pick up the
phone to ask about your money. In this economy, people will easily ignore an email, letter or fax. Do not wait 45-60 days
to initiate collection procedures. The polite, but squeaky vendor always gets the check.” (Emerson)
Read the entire discussion, and join the conversation:
http://www.focus.com/questions/finance/cash-management-best-practices-what-are-your-3-tips-better/
Best Practices for Managing Cash Flow Focus Research ©2011 4

5. Contributing Experts
Bob Dawson
Consultant/SI, The Business Group
www.focus.com/profiles/bob-dawson/public/
Melinda Emerson
President, MFE Consulting, LLC
www.focus.com/profiles/melinda-emerson/public/
Susan Lannis
Time Liberattion Agent, ORGANIZATION Plus! Inc
www.focus.com/profiles/susan-lannis/public/
Robert A. Marchello
CEO and Managing Member, Marchello Consulting Group, LLC
www.focus.com/profiles/robert-a-marchello/public/
Veronique Palmer
Managing Member, Lets Collaborate
www.focus.com/profiles/veronique-palmer/public/
Phil Simon
Author, Owner, Consultant, Speaker, Writer, Phil Simon Systems
www.focus.com/profiles/phil-simon/public/
John Warrillow
Built To Sell
www.focus.com/profiles/john-warrillow/public/
About this Report
Focus Best Practices Reports are designed to help professionals understand business and technology Best Practices
for particular topic areas. The best practices included in each report are sourced from Focus Experts who have exhibited
expertise in the particular topic. Best Practices Reports are designed to be practical, easy to consume and actionable.
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