Importance of cash flows
		Cash flow statement
		Cash management options
		Electronic services
		Merchant services
		Payment with credit cards
		Managing receivables
		Managing inventory
		Using trade financing

As a small business owner, you want to review how well your company does over a period of time. To measure the company's performance, the accountant prepares financial statements.

The major financial statements include the income statement, balance sheet, and statement of cash flows. At a minimum, you will likely share this snapshot of performance with lenders, equity investors, and your board of directors. More than likely, you also share this information with key employees.

While the balance sheet gives a snapshot of your firm's financial position, your income statement and cash flow statement show performance over the period of time that ends on the date they are prepared. Of these two, the income statement is usually in the spotlight. It shows sales, expenses, and profits or losses for the period just ended.

For small businesses, however, the statement of cash flows is often the most important of the three statements. Cash is the lifeblood of companies, especially small companies. It takes cash to pay employees, suppliers, and taxes. As a small business owner, you may loathe taking a salary today. Unless you intend to sell your business for a profit, eventually you too will rely on your firm's cash flow for compensation.

In order to pay your bills, you must depend on timely payments from your customers. It soon becomes clear that all of the involved parties--customers, vendors, employees, shareholders, and lenders--have a stake in the financial success of your business.

If you mismanage your cash inflows and outflows, you will face a liquidity crunch. A liquidity crunch forces you to borrow at a disadvantage: you may be in such dire need of short-term cash that you pay more for a loan or line of credit than you would with better cash-management techniques.

This educator aims to illustrate some of the basic ways to monitor and improve cash flow for your business. We look at some of the fundamental principles of cash management. We also take a look at some of the electronic and merchant services that banks provide today.

Here is an overview of some of the techniques and services you can use to improve business cash flow. Subsequent topics in this educator discuss these techniques in greater detail:

• Use a budget. A budget allows you forecast your cash inflows and outflows over the near future. At a minimum, cash flow forecasts should be done for a three-month period, even monthly. If you find yourself forecasting for even shorter periods of time (to make payroll, for instance), you may want to seek a line of credit or other borrowing facility that banks offer.
  
  
• Invest surplus cash. A budget also lets you identify variances in forecast and actual cash flows. If you find that you have idle cash each month, you can deposit it to earn interest. Using a zero-balance or sweep account, you can park this cash in safe, liquid investments for periods as short as overnight.
  
  
• Managing accounts receivable. Accounts receivable are the sales that you make on credit. In exchange for extending credit to customers, you encourage additional sales, but it's important to have the discipline and impartiality to collect. You may have to write off some of your accounts receivable from time to time. However, a diligent focus on collections policy will improve your cash flow management by tightening up on customers who pay you late.
  
  
• Managing accounts payable. Accounts payable are debts you owe suppliers and vendors. Accounts payable are the reverse of accounts receivable. If available, you may want to take advantage of discounts your suppliers offer you as an incentive to pay early.
  
  If you decide to take the full period to pay, don't delay any further than necessary: you risk your reputation with suppliers and may jeopardize future deliveries. Just as you don't like it when customers pays you late, suppliers and vendors dislike it when you pay late.
  
  
• Managing inventory. It's easy to stock up on materials and supplies you may you need, only to find out later that you've bought too much. It may be even more tempting when suppliers offer a discount. However, by tying up excess cash with inventory, you lose the opportunity to use cash in more productive ways.
  
  
• Alternative sources of financing. Leasing lets you conserve cash. Small businesses routinely use an operating lease to finance everything from office and computer equipment to the capital equipment needed to make their products.
  
  An operating lease requires smaller payments than using traditional loan financing. When the lease term expires, you can exercise the option to purchase the equipment, renew the lease, or walk way and obtain new equipment.
  
  
• Debt management. Paying your bills on time also applies to loan payments. If you have an amortizing loan, you face fixed periodic payments. If you have surplus cash, you may decide to pay down the loan. While you lose some tax savings on the loss of interest expense, you improve your reputation with lenders as a reliable and liquid borrower.
  
  Be sure to forecast as a part of your cash flows the amount of debt principal that will mature soon. For example, you may have a $500,000 loan that requires paying down $100,000 at the end of every year for the next five years. Omitting this scheduled repayment from a cash flow forecast will likely force you to scramble to refinance the debt when the current portion comes due.
  
  
• Making periodic tax payments. The IRS requires small businesses to make estimated tax payments for income taxes every three months. You may also owe income or excise taxes to state or local authorities. An electronic tax-payment system can help you to improve your cash flow forecasts.
  
  To help you estimate future tax payments, the IRS launched Electronic Federal Tax Payment System (EFTPS OnLine) in the third quarter of 2001. EFTPS OnLine is a Web-based electronic-payment system aimed at improving the process of making estimated quarterly tax payments.
  
  

Next Topic: Cash flow statement