An accountant told me that it is nearly impossible for some businesses to access traditional financing. Some of the culprits being referred to are your typical “cash businesses”: restaurants, bars, nightclubs, jewelers, service stations, etc. Though there are some validity and merit to the statement, the fundamental issues that prevent businesses from accessing capital have deeper roots:
- Lack of information about available credit options;
- Lack of skills creating loan packages for the banks, alternative loan agencies or investors; and more pronounced
- Poor and inadequate financial management and reporting, especially the non-reporting of a company’s true business performance for fear of a tax bill.
The Irony: Tax Laws Could Help Businesses Improve Cash Flow Management
For many ‘Taxes’ is a derogatory word, a taboo. However, the truth is, one must accept that it will never be removed from the dictionary, tabloids or the cultural conscience.
So just deal with it! Managers often interpret taxes as a penalty for doing business – however – the time has come for managers to approach their tax obligation as a regular business operating expense that can be managed downward with the right attention. This calls for proactive tax planning, not tax evasion or revenue hiding. Should this feat be achieved, the benefits would be clear.
Recently enforced tax law by the IRS, Section 6050W could be a redemptive song for many small businesses – that is, if your goals have always been to report lower revenues in an effort to pay lower or no tax bill at the detriment of your business growth.
Section 6050W requires financial institutions to report their merchants’ annual gross payment card transactions processed by credit, debit or co-branded cards and third-party network transactions (flexible spending accounts, for example) to the IRS on newly-created 1099-K forms.
It should be noted that banks make decisions about your creditworthiness based on your credit ratings and ability to repay a loan. The ability to repay a loan is evidenced by your tax returns. As such failure to report true revenues and profits could be financial/cash flow suicide.
Switching Gears: 10 Ways to Manage Business Cash Flow
Proactive tax planning is one of the many ways to “Prop-UP” cash flow. Some other techniques that can be employed by managers to boost their working capital and business growth include:
- Increase Revenues: A no brainer. The move should be to increase revenues at a faster pace than costs. Revenues could be increased through introduction of new products, expansion into new markets or up-selling to existing markets.
- Rationalize and cut costs: Create and prioritize a list of all cost and determine cost cutting opportunities: Re-negotiate contracts, settle debts at lower amounts, find a more competitive supplier, etc. Successful rationalization and cost cutting initiatives are never at the expense of good customer service and operational efficiency.
- Improve Operational Efficiencies: This is a very important area for cash flow improvement. Case in point, if a restaurant’s gross margin is running double digit below the industry standard, it could mean there is a need for increases in overall prices or the introduction of better portion and wastage control policies.
- Delay Payment or Negotiate Extended Payment Terms: Speak to your suppliers and request extensions – the reality is they do not want you to go out of business. Don’t ignore calls from suppliers.
- Get a Loan: A number of business owners pride themselves on the fact that their businesses have zero debt. Considering conventional wisdom, this might be a good thing, but could be detrimental to profitability. Sometimes it may be better to use other peoples’ money to grow your business – especially because of the potential tax benefit associated with having an interest expense.
- Consider Collection &Factoring – Business owners need to keep track of their accounts receivables and manage aging reports to ensure that collection is being made promptly. Another option could be accounts receivable factoring. Factoring is a relatively expensive financing option and should be a temporary measure to bolster cash flow. Factoring should never be a long-term solution for increasing cash flow.
- Consider a Sale of Old Inventory – Inventory in warehouse represents tied up cash. Get rid of old inventory, it would be better to get 5% mark-up than none at all while your business suffers.
- Dispose of Unused Assets – Determine if there are assets in the business that are no longer in use and have a value of the market.
- Seek an Investor/Partner – I have come across business owners who would prefer to go down in the hole rather than allowing an investor to bring some money into their business. A lot of times, such reservation is driven by personal experience or horror stories. Not all investors are dishonest.
- Finally, Manage Labor Cost – Redundancy is typically the first move many companies use to improve cash flow. Though this is logical, such action executed hastily could result in lower staff morale and unhappy customers. Obvious areas to begin streamlining include low performers and duplicative roles.
Cash is still Key
A business will not be able to invest in product development, expand marketing initiatives, develop and improve infrastructure, acquire the necessary equipment, hire and pay employees and cover its operating costs without adequate cash flow. Should a business lack the cash to execute on these growth initiatives, it will experience a real stalemate.
It is time to turn on the light and remove the myths and spookiness historically associated with sound financial management. Typically, businesses that institute proper financial management usually perform better than businesses that don’t. Two tools that can be used to assist with cash management are budgets and daily cash summary reports.
- IRS Increases Focus on Employer and Employment Tax Audits, Thorn Comments (prweb.com)
- TurboTax – Filing Your Taxes Late (turbotax.intuit.com)
- TurboTax – Tax Time Scams You Should Avoid (turbotax.intuit.com)
- TurboTax – Victims of Hurricane Isaac Benefit From IRS Tax Filing and Payment Extensions (turbotax.intuit.com)
- Accounts Receivable Financing Site Featured on SmallBizTrends.com (prweb.com)
- Factor Funding Co., Provider of Invoice & Receivable Factoring Services, Announces New Website (prweb.com)
- Property Investors – Avoid These 3 Cash Flow Killers (prweb.com)
- Managing cash flow in retirement (fidelity.com)
- 5 Common Small Business Accounting Mistakes (grasshopper.com)
- Lloyds TSB: Export Cash flow projector (businesshelp.lloydstsbbusiness.com)