CAPITAL GAINS
Businesses that maximize cash flow, on the other hand, are likely to boost their competitive position, reduce costs, and ratchet up margins. Yet success doesn’t necessarily come easily. Strong cash flow results from establishing strict deposit and payment terms with customers, keeping a close eye on receivables and payables, using maintenance contracts and services to provide more stable and predictable income, and managing banking and credit services.

Effective cash flow management requires optimal handling of receivables and payables. Fast-growing firms often find that particularly nettlesome, and in the volatile channel distribution space, problems become magnified. “One of the biggest problems is that growth costs money—especially if you’re operating on a receivables basis,” states Robert Kosbie, CPA, CFP, and principal at Kosbie & Kosbie, a Santee, Calif., financial advisory firm. “Some companies find themselves in a position where payables come due sooner than receivables come in.”

This situation sometimes leads companies to borrow from one source to pay another. If a company relies heavily on credit cards or bank loans to shore up cash shortages, the resulting interest payments will eat into operating cash or reserves. Executives must examine investments in equipment and infrastructure while ensuring that they’re collecting from customers in a timely manner.

Although a growing number of SMBs use accounting packages such as QuickBooks, Microsoft Office Accounting Express, Microsoft Dynamics GP (formerly Great Plains), or Sage Software’s Peachtree for forecasting, many firms underutilize these applications and others remain mired in spreadsheets or paper. Without a system for tracking fluctuations in cash flow and understanding its impact, it’s impossible to make sound decisions. Winter says that the effective use of accounting software, along with clearly defined metrics, can help identify problems.

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