Liquidity Management: Why Is It Important?

Efficient liquidity management ensures you have adequate cash to cover your expenses. When practiced effectively, it can help a business manage its finances such that all expenses are covered by the available cash reserves. Liquidity management is necessary to allow businesses to function smoothly, including discharging financial responsibilities in a timely manner.

In the absence of a sound liquidity management program, the business may operate within what could be a false sense of financial security. Cash balances may appear inflated, leading to situations where financial resources are actually depleted without it being apparent. In case of reduced cash stores, businesses may continue to operate in the knowledge that they have adequate money, until an unexpected emergency or requirement surfaces.

Cash emergencies can take up different forms; right from loss of revenue in the form of a key client or a good investment opportunity for the business, or simply an unseen expense. Without liquidity management, it is easy to slip into a state of unawareness. However, this can spell bad news for the business. Payments not honored or checks that bounce can create a negative image for the business; they can also shake up investor trust.

Poor management of cash or liquidity can also hamper operations. Salaries can get impacted, plans for growth and expansion may face suspension and the business may lose out on good opportunities. The other important aspect of sound liquidity management is to ensure that there is a cash reserve for the business at all times. Usually, everyday income does not match up to the expenses incurred by the business. For this reason, cash flow needs to be managed carefully to ensure that expenses do not exceed cash reserves.

Four Business Functions To Automate

Four Business Functions to Automate
Most small to mid-sized businesses operate under restricted budgets and must optimize existing resources to remain within budget, while ensuring that client services and client expectations are met. 

Automation can assist small businesses in optimizing existing resources. Identifying key areas to automate can produce significant increase in productivity. Below are four business functions worth considering for automation. 

Bookkeeping is the foundation for accounting. When a company automates bookkeeping functions, record keeping is completed in a timely and accurate manner. 

Accounting functions are the backbone of every business, including start-ups. Accounting requires maximum attention to details. A minor error that occurs when recording financial transactions can result in under or over reporting of profits, or worse--significant tax implications. For many small businesses, the owners are responsible for the accounting and also providing the services to clients. Business owners can perform a finite number of tasks and do them well. They can either work diligently to ensure client services are met, thereby neglecting the accounting tasks, or they can pull resources from client services to concentrate on the financials. Automating the accounting function can assist in ensuring both objectives are met. 

IT Processes: Small businesses depend on IT for speed and efficiency in servicing clients. Automating IT processes can assist in ensuring better record-keeping and adherence to deadlines through a system of automated triggers, email-reminders, etc. 

Training and Communication: In the case of small businesses where employees may work remotely or in various geographic locations, business owners can create frameworks which serve as information and training portals, thus reducing time and expenses involved in live training and knowledge transfers. 

The Importance of Benchmarking

Benchmarking is used by many business owners to assess the health of their businesses. An industry benchmark is typically a range of financial performance metrics in key areas, compiled by averaging data from a group of comparable businesses. These benchmarks provide a reference point for business owners to gauge the areas of financial success and measure progress against established goals.

When evaluating benchmarks to assess financial successes and progress the following should be considered:

Compatibility of data - When selecting comparable companies, the businesses selected should have many similar characteristics. For example, the comparable companies should be similar in size, offer similar products and/or services, have a similar corporate structure, and an equitable number of employees. Comparing a company with 500 employees to one that has 25 will not be a good comparison--even if they offered identical services.

Time period of data - It is imperative to understand the time frame of data comprising an established benchmark when comparing a business’ financial performance to that benchmark.  For example If you have a retail store and you want to compare it against other retail stores that are similar in size, product, and corporate structure and the data from the benchmark  was compiled for the period  January 1 2008 through December 31, 2008 and the data collected for the retail store is January 1 2012 thru  December 31,2012, the bench mark may be faulty because economic conditions may have changed substantially.

Calculation methodology - When developing benchmarks, it is important to know how the comparative businesses arrived at the calculations so that the financials are a true comparison.

Key metric comparisons - There are several ratios that businesses use to assess financial performance which can be useful to benchmark. These include

• profit margin - measure of profitability 
• current ratio - measure of liquidity, current assets/current liabilities 
• quick ratio -measures immediate cash liquidity, cash, plus accounts receivable/liabilities 
• debt/equity - measures how well a company is leveraging its debt 

Financial benchmarking is a valuable tool for small to mid-sized businesses in assessing how they compare with their peers. Alan Neal & Associates is currently offering a free analysis of your business processes and accounting system. If you would like to learn more on how we can assist with your business processes, including benchmarking, please call me at 423-756-4076 or email me at alan@alanneal.com. 

Elements Of Sound Accounting Systems

Whatever the type, whether it is open-book, or the double-entry bookkeeping, accounting systems form the backbone for a successful and profitable business. This is true, regardless of the industry you operate in. If there is any difference, it is in the elements that may differ for accounting in different industries. For example, accounting systems of a hospital or medical care home will differ greatly from that of a publishing house or a home furnishing supplier. However, this does not reduce the importance of even a single element; for a business to run profitably, it must pay close attention to its bookkeeping and accounting.

In general, accounting systems need to contain the following elements to ensure that the business' bottom line stays on the path to growth.

Bookkeeping: Accounting is incomplete without a sound bookkeeping system in place. Bookkeeping keeps track of essentials like entering transaction details that help you keep track of your cash. For example, when accounts payable and receivable are updated regularly by the bookkeeper, it allows you to know at a glance the amount of cash owed to you, or the payouts you need to make.

Payroll: If you have employees, particularly those working on variable terms, you would need to assign a hired accounting professional to take care of the payroll. Automated accounting systems in particular, take into consideration elements like variable working hours, holidays taken, etc. to ensure accurate and timely payroll.

CFO and Controller level insights: CFO or Controller-level recruiting can prove to be expensive for small businesses and enterprises. But these are indispensable to the growth of a business. Apart from reviewing existing accounting and bookkeeping practices, CFO and Controller level insights can provide your business with crucial decision-making inputs. For a business with budget constraints, outsourcing this element of their accounting systems can help make a big difference to the growth and expansion curve.

Why Should You Choose CFO Outsourcing?

Outsourcing key services such as administration management, accounting, or strategic CFO and CEO-level business insights can actually help you to focus on your business better. Often, more than poor services it is elements such as budget restrictions and inadequate back-end services management that can hamper the growth of a small business or an enterprise.

Why hire a CFO?

Why should you consider hiring a CFO? After all, they are a highly skilled talent and expensive to hire. But you don't always need to hire an in-house CFO. Outsourcing CFO-level expertise can prove to be immensely useful to your business. Some of the reasons that you need to consider a CFO for your business can include:

• Lack of accounting and financial expertise
• Lack of relevant bookkeeping expertise and practice
• Budget restrictions; CFO is an expensive resources

On the other hand, how can outsourcing CFO or CFO-level expertise help your company?

Outsourcing a CFO can help:

• Free up your time; help ensure you can focus on business growth and expansion
• Streamline the bookkeeping in your company
• Ensure accounting functions are carried out in a timely manner
• Streamline your inventory; put into place better inventory management
• Improve financial reporting
• Ensure company funds are utilized properly
• Advise on making better investment decisions
• Ensure your company outlines more effective credit terms with clients as well as providers and vendors

Further, outsourcing a critical function like that of a CFO can help your business make measurable savings as well. You not only save on salary and infrastructure, but also ensure that the company benefits from professional expertise.

Evaluating the Efficiency of Your Accounts Receivable Processes

You can ensure your company's accounts receivable processes remain efficient by reviewing the performance of the collection processes and key metrics associated with them. Below are some suggested metrics that you may consider integrating into your financial analyses in order to determine whether you are using optimal accounts receivable processes. 

Receivable Turnover Ratio - This is your credit sales divided by average accounts receivable.  This measures the number of times trade receivables turnover during the year, and is an indicator of how efficiently your company is collecting credit sales. Maintaining a sound accounts receivable practice and a strong credit policy help maintain the liquidity of your business. The higher the turnover of receivables, the shorter the time between credit sales and cash collected on those sales. 

Days Sales Outstanding - This measures the average time in days that receivables are outstanding or uncollected. Generally, the greater the number of days outstanding, the greater the probability of delinquencies in accounts receivables. The longer your credit sales remain uncollected increases the probability of the inability to collect those receivables. 

Accounts Receivable Follow-up - The increase of two or three days in sales outstanding can have a significant negative impact on the liquidity of a small to mid-sized business. Consider creating an account collection procedure that provides the actions and methods for processing late or delinquent payments. The account collection process should commence as soon as the account becomes past due. These functions and reminders should be automated wherever possible. 

Consider evaluating your accounts receivable processes based on these metrics and practices to improve the collection process of your credit sales. 

 

Tips for Effective Budgeting

Budgeting is essential to every company regardless of size.  An effective budget helps with planning and is essential for reaching objectives and goals while preparing for difficult or unexpected financial situations. Here are 5 tips for creating an effective budget:

·       Budget should be for a specified period- The budget most often is based on the company’s fiscal year and broken down into monthly budgets. When creating the budget, consider the timing when both income and expenses will occur. 

·       Don’t try to budget to the penny-  Accurately predicting actual results is not the objective, it's about providing your company guidance for coarse direction.

·       Forecast your income and expenses- Review your current and historical financial data and project your income and expenses for a specified timeframe.  Income should include payments received from sales, interest, accounts receivable and other sources. For expenses, all expenditures should be included, such as payroll, materials, note payables, utilities and any other expenditure. 

·       Run budget comparison reports- This is often referred to as a “variance report." Comparing your budget with actual amounts earned or the expenses you incur will enable you to determine the corrections needed to grow your business.

·       Create profit and cash flow targets- Every budget should include profits and cash flow targets, because they are both bottom line measures that require different functions to control and manage them. Every year companies with very attractive profits go out of business for lack of cash.

Follow these five budgeting tips to create an effective budget for your business. Use your budget as a guide, and make corrections as needed to stay the course. 

Please tell us what you need to know! We welcome all suggestions for articles, interviews, or whatever else you might like to see in the next issue of Financial Matters. 

Forecasting vs. Budgeting for Small Business

Running a business presents many challenges, and there are financial practices available to assist in the planning and management of your company’s financial future. The use of financial forecasts and budgets 

 

can help you determine where your company is headed and how you can achieve your financial objectives and goals. People often use the terms "financial forecast" and "budget" interchangeably, but each provides distinct and essential functions. It is important to determine the functions of each in order to apply them effectively.

Forecasts - Make predictions or projections of expected revenue and expenses based on historical data, managerial expectation and foresight, and other factors into an uncertain future. A financial forecast seeks to predict a company’s financial position, cash flows, sales, expenses and other figures in the future. Forecasts are more flexible and will change as your company’s financial position and market factors change.

Budgets - A budget is a detailed financial plan consisting of a defined set of financial objectives that guide thedecision making processes and seeks to exercise control over the company finances and resources while guiding the company to where it needs to be. The objective is to insure that the company does not spend more than they are making in sales revenue. Often, adjustments must be made and are reflected in a “variance report." This report shows the budgeted amount compared to the actual amount realized. Budgets allocate money for specific purposes and are the objectives and goals set for the company.

Forecasting and budgeting are both financial practices that assist in preparing for a company’s financial future.  Typically budgets are prepared yearly, while forecast are prepared more frequently, usually monthly. Forecasts tend to change based on financial and market conditions, while budgets are more concrete.

It is essential for small and mid-sized companies to be aware of their finances at all times because one small operating error could spell disaster. That’s why it is critical for small and mid-sized company owners’ to forecast and budget. Knowing how much to spend and on what is the most important thing for a small business to stay solvent.

We are currently offering a free analysis of your forecasting and budgeting process. If you would like to learn more on how Alan Neal & Associates can help move your company forward, please call me at 423-756-4076 or email me at alan@alanneal.com
Alan Neal  CBA, CM&AA

Why Outsource?

Following are just a few reasons to consider outsourcing to meet your accounting needs: 

Reduce Overhead

• in-house accounting departments are expensive!
• avoid paying for space, equipment, employee benefits, etc.

More Time for Core Business Operations

• no hiring or training required for the accounting department
• no need to monitor 
• spend more time generating income! 

Accuracy

• financial data is entered by professionals
• accuracy is double-checked
• data can be accessed anytime, from anywhere

Access to Highly Trained Professionals

• work is performed by the appropriate professional
• your bookkeeper doesn't have to be CFO and controller and bookkeeper
• current employees can be better utilized

5 Tips for Forecasting & Maintaining Cash Flow

1. Calculate your break-even analysis. The budget process begins with a break-even analysis, the equation that shows a business' base cost to provide its product or service. Due to the uncertainty of revenue, businesses must keep fixed cost to a minimum, and manage the variable cost closely. Most business owners are preoccupied with covering daily expenses and making payroll, and fail to perform this analysis, exposing their businesses to undue risk. 

2. Re-evaluate fixed expenses. The fixed expenses normally represent the largest expenditures from a company's cash flow. As a business owner, you should second-guess your fixed expenses to see where savings may exist. Be certain the fixed costs are commiserate with revenue levels, and scrutinize all variable costs to death. 

3. Review financial status monthly for tax purposes. Review your financial statements monthly in order to know the tax liability incurred and include this liability into the cash flow forecasting schedule. 

4. Know your business and know your customers. Knowing your customers' payment habits is the key to producing a good cash flow forecast. When forecasting the in-flow and out-flow of cash, things rarely - if ever - go exactly as you plan. But, the better you know your business and your customers, the more accurate your forecast will be. 

5. Evaluate variable costs at least every six months. You should regularly evaluate or audit variable expenses, such as office supplies, for necessity. 

Components of an Effective and Efficient Cash Management System

In any business, as the saying goes, "cash is king," but it's especially true for small and mid-sized businesses where minor fluctuations in cash flow can have a tremendous impact - either positive or negative. Even so, many companies do not have a formalized cash management system. Many business owners tend to concentrate on earnings, rather than cash flow. Companies don't file bankruptcy because they incur an accounting loss; they bankrupt because they do not have the cash to pay their obligations. 

Optimizing cash flow management is one of the most important tasks in achieving overall financial health. Efficient cash management goes beyond economic or financial planning. In order to convert your budgets and plans into cash forecast, you need a timeframe for transactions that generate income as well as those that relate to expenses.

An effectively administered and efficient cash management system will consist of:

Cash Flow Forecast - To effectively manage cash flow, you must be able to accurately forecast when you will receive cash and when cash must be paid out. The cash flow forecast covering a fiscal year should be based on the company's budget and adjusted for the timing of actual receipts and disbursements of cash for each line item of the budget. Using an accurate and detailed cash flow forecast, along with a detailed operating budget, enables businesses to evaluate future cash requirements, ensures that liabilities can be paid on time, and that capital can be secured to avoid a cash flow crisis. Optimally, businesses need to forecast daily, weekly, monthly, and annually, and compare the forecast against actual results and modify the budget and forecast when warranted.

Banking Relationships - The relationship between business owner and banker needs to be one of trust and partnership. The key is excellent communication. You need your banker on your side, and to make that happen, he needs to understand what you are doing and be confident in your expectations for the future. Your banker expects you to know much more about your business than he knows, and you need to keep him informed about your business and what you expect to happen in the future. The better you can project and forecast, the more confidence your banker will have in you, and the borrowing process will be smoother when the need arises. 

Line of Credit Access - Shortfalls in cash can be devastating to businesses, and depending on the extent of the shortfall, recovering can be difficult. Establishing a line of credit as part of your contingency plan offers benefits. In some cases a line of credit is the best solution to maintain liquidity. 

Investment Of Surplus Cash Program - Using your cash flow forecast and your detailed budget together ensures the availability of funds to pay liabilities and allows you to see the timing of surplus cash. Rather than allowing the bank to sweep the account, the surplus cash can be invested in higher yielding, safe investments. You can choose these investments based on the availability of the cash before it is needed to fund operations. Higher yielding investments will increase interest income and free cash flow, enhancing company profits and value. 

Why Bother Outsourcing Your Accounting Function?

Automation has made accounting and bookkeeping easier. However, problems of carrying out a job right still remain. Outsourcing your accounting function makes immense sense, especially when your business is an entrepreneurship or a small business. If you're a business owner yourself, you would probably not understand nuances of accounting and bookkeeping unless you're trained. Further, there are other aspects to outsourcing accounting.

Business first
Save your time and energy and effort for your business. Outsourcing the rest of the administrative work, including your accounting, makes immense sense. Remember, your accounting will form the financial backbone for your business.

Do not neglect your customers
If you're not a trained bookkeeping or accounting professional and you are depending on self learning and instinct, you may succeed, but at a price. You may have to spend time away from your customers and instead, ensure on accurate accounting. Instead, outsourcing your accounting will help you serve your clients' needs better.

Discovering last minute errors
This could be a nightmare that can be avoided completely. An accounting and bookkeeping professional will know best about paperwork that needs to be completed, especially for IRS and taxation purposes. Even the best of your intentions may not help your business if your paperwork falls short on requirements. Outsourcing your accounting needs to a trusted vendor can save you precious time and money in penalties.

Meet your deadlines
The last thing you want to do is work around clashing deadlines. Your client requirements are piling up, work is suffering, but you're busy with bookkeeping and accounting because you really don't have much choice. To add to the chaos, you discover that some key entries are missing from your books and you may have to spend additional time looking for the relevant paperwork before you can make those entries. Outsourcing you bookkeeping and accounting can help you avoid these problems.

Technology: Changing Business Operations

Technology has influenced how the business world operates. It has influenced practically all aspects of day-to-day operations of businesses, both large and small. We live in a world that is more connected than ever. Business relationships are formed through social media platforms and on networks. Geographical boundaries are becoming less important, as clients are more focused on the quality of work performed, rather than where the work is being performed. In light of these changes, companies are assessing their business processes, including how their accounting departments operate.

The Cloud
Cloud computing, sometimes referred to as Software as a Solution (SaaS), is a model where the cloud provider installs and operates the applications, hardware and software in the cloud, allowing users access over the internet, as opposed to having to load the software on an individual hard drive or central server.

This technology enables users to access the programs from anywhere, anytime giving them more flexibility and 24/7 access to accounting data. Additionally, the companies that host cloud-based programs are often responsible for handling IT issues, data security, and backups, so that businesses can reduce their investments in IT services and staff, thereby increasing profitability.

Outsourcing
Although outsourcing has been around as long as work specialization has existed, in recent history more companies employ the outsourcing model and even outsource whole non-core operations. One of the most commonly outsourced departments is that of finance and accounting.

Business owners have realized that the processes in this department can be done more efficiently, and therefore more cost effectively, by companies equipped with the proper tools, processes and appropriately trained personnel. This practice is particularly beneficial to small and mid-sized companies, because it allows them to access a wide array of professional skill sets that otherwise might be inaccessible or unaffordable.

Virtual Accounting Office
When services are provided “virtually” the work is performed off-site, creating substantial savings. Besides not having the expense of a full-time employee, the business owner also saves the cost of office furniture, equipment, and even office space.

In addition to substantial savings, businesses enjoy access to accounting and finance professionals with specific skill sets. With geographical boundaries erased, the location of those skilled professionals is no longer an issue. Services can be performed anytime, from anywhere.

Reliable Access To Information
Technology changes the way business relationships are formed and how they work; it also gives us almost instant access to reliable information. Members of the workforce are accustomed to having access to information whenever they need it and having that information allows them to perform services quickly.

Monthly revenue and profitability reports are important tools when making business decisions, but in an age when work is performed in different time zones, and outside of traditional business hours, instant access at any time to additional data can improve operations. Decisions that can impact the company must be reached with real time data to insure the most effective and efficient course of action can be taken.

Businesses must embrace technology that impacts their accounting department to remain competitive. We are currently offering a free analysis of your accounting business processes and accounting systems. If you would like more information on how Alan Neal & Associates can help improve your profitability, please call Alan at 423-756-4076, or send an email to alan@alanneal.com.