Article

Cash Flow Is Everything

The magazine’s resident accounting specialist offers a few ideas on how to generate and maintain cash flow. He also issues a couple of warnings to dealers.

February 2013, Auto Dealer Today - Feature

by David Keller, CPA, CFE - Also by this author

Cash is the green stuff everyone in business is after. You wouldn’t be in business if you weren’t. Now, cash can come from many different sources, some that are good and some not so good. Every month, we get questions regarding cash flow and how to manage it better, so I thought I’d offer my thoughts on the matter.

One source of cash comes from existing savings you may have accumulated over time. The cash may have been generated from wages, investments, etc. This cash could be in your checking or savings account, and it may be your nest egg for the future. That means you have to be very careful with it, or at least you probably should be. Failure to care for your savings may put your future plans and retirement in jeopardy.

Another form of cash flow is a loan. The loan can be from a bank, financial institution, family member, friend, investor, etc. The bad thing about loans is someone always expects you to repay them some time in the future, and they’ll want to generate a return on the monies lent to you. These loans may be collateralized by real estate, inventory, receivables, fixed assets, etc. The problem with this is if you happen to default, the precious assets you pledged can be taken by the lender to satisfy the debt. They may even chase you for any deficiencies if the collateral isn’t enough to satisfy the outstanding loan balance.

Cash can also be inherited from someone. The nice thing about this is it is normally tax free, depending on the circumstances. You don’t have to repay it, and there may not be any restrictions on its use. The proceeds from a life insurance policy that names you as a beneficiary can also be a source of cash. Normally, this cash also is tax free and doesn’t have many restrictions on how it’s used.

Cash is normally the most important asset in your business. Your bank balance may be low on any given day, but the amount of activity in the ac- count can be extremely high due to large deposits and disbursements each day. Cash is the livelihood of your business and must be monitored each and every day.

At some point, you may need to turn your assets into cash. This will help you pay your bills, wages, distributions, payroll and sales taxes, loans, etc. You can normally get away with not paying some of these items for a short time, but sooner or later they will catch up with you. Either way, it’s not pleasant to see a dealer without adequate cash flow operate his or her business effectively.

Many times the controller of the company uses up most of the day trying to find enough cash to release some checks to vendors or to pay off a vehicle floorplan. To me, this seems like a gigantic waste of time. It doesn’t help you become more profitable and causes a lot of stress in the accounting office. It may also worry you each day to the point where you don’t have time to properly operate your business. Bottom line, this can create a very unhealthy environment for your business.

So, how can you stop this vicious cycle? It probably won’t be easy. Normally, cash flow increases over time when sales and gross profits increase. It can also increase if your cost of sales, or expenses, is decreased when everything else remains constant. This is where you have to analyze your business to find the best and quickest way to increase cash flow.

In certain businesses, increasing sales faster than cash flow normally results in a higher receivables balance, which uses up cash. So, it may make sense to pace your sales increase to give your cash flow time to catch up and remain in sync with production.

The best place to start is to look at your most liquid assets and the current market situa- tion on liquidating them. If it is inventory, you may have sources which will buy it from you and pay you immediately. You may also increase your sales and gross profits to generate cash. If it is receivables, you may have to make phone calls to your customers who are past due to nudge them to pay you.

Another thing you should be doing is projecting what your cash flow needs are in advance of actually needing the cash. This will always make things go smoother, as it allows you time to approach your lender for an increase, sell excess inventory, collect delinquent receivables, or review your personal assets to see where cash could be generated so you have it on hand to make payments in a timely fashion.

Ideally, you want to give yourself adequate notice of when and how much cash you will need so your business is not crippled and struggling to operate every day.

Good luck on managing your cash flow. If you do nothing else each day, spend a few minutes with your cash so you know where you are at, and where you can go with it.

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