Recent economic trends have caused many contractors and other businesses to deal with accounts receivable issues.  Five years ago, when the economy was better as a whole, there was less concern with enforcing a contractual right to payment because bills were being timely paid.

For those contractors dealing with collection issues, not much can be done to “squeeze blood from a turnip”—if your customer has no money, collection efforts are often futile.

But to best assure your ability to collect debts, a few steps can be taken at the contract stage and during your work to best assure your ability to collect.

As a litigation attorney, I can advise you that these are the circumstances that best allow me to collect debts owed to my clients:

• Clear and certain scope of work terms set forth within a signed contract, including signed change orders confirming any revisions to the scope of work or the contract price (don’t forget to make sure your home improvement contract meets the legal requirements of Business & Professions Code section 7159, otherwise collection will be even more difficult);

• Attorneys’ fees provisions in a contract that help you leverage payment short of incurring attorneys’ fees;

• Service charge provisions in a contract that further help you leverage payment of at least the principal balance owed; continue

Retirement - you may already have a date in mind, a particular birthday or after a certain number of years in the CEO’s position, but will the money be there to support your retirement needs when the date rolls around? Many people get to their hoped for retirement date only to find their finances are insufficient and their dreams need to be put on hold. Planning for your retirement from the business should be a long term and well thought out process so that it can happen when you want it to. There are a number of steps you can take to set a realistic retirement date.

First, you must determine what your financial needs will be during your retirement, and that means budgeting for an unknown number of years. Some financial planners use 70 percent to 75 percent of pre-retirement income as a general rule, but this only applies if your financial needs actually decrease after your retirement.

Similarly, a little forward planning can allow you to minimize your expenses and reduce or eliminate many debts by the time you expect to retire, for example, by paying off existing mortgages and other long term debt obligations.

Regardless of the post-retirement income you think you’ll need, experience shows that most retirees find they need more than they originally anticipated, so it’s always wise to include a contingency in your estimates of the income required.

Still, for many business people what they are really relying on is a good sale price for their business as the major contributor to their retirement income. That means some expert advice from an evaluator. But there is still a piece of the jigsaw missing – you could be taking the opportunity of the years between now and your retirement to actually improve the value of your business by improving its cash flow. As an experienced business owner you’ll have an appreciation of the importance of cash flow. It’s always referred to as the ‘lifeblood’ of a company and rightly so, and it will also have a major bearing on the value of the business at time of sale, and therefore on when you can actually retire from your company.

Cash flow is what buyers want

The first consideration is that when you’re looking for someone to buy your business they’ll be looking carefully at its cash flow. The cash flow generated by the organization is what gives the business its real value. To put it another way, nobody pays for ‘potential’; what they purchase is a machine that makes money.

It’s cash flow that will enable the buyer to pay you for the business, and that’s equally important if you’re selling out to employees or expecting a member of the younger generation to take over and provide an income flow for your years of retirement. It’s absolutely essential that you have a forecast of your cash flow up to the time of your projected retirement – and as far beyond as estimates can be made. If the forecast indicates that the firm’s cash flow won’t be sufficient to cover all your objectives then you may have to do one of the following:

• Set a later retirement date
• Phase out your departure from the business
• Find a purchaser with cash instead of financing a relative into the business
• Find ways to increase the value of the business so it brings a higher sale price
• Reduce your retirement lifestyle expectations

Take steps to improve your cash flow

It might prove a painful reality check, but preparing an estimate of the business’ future cash flow is an essential part of retirement planning and a reminder that your long term dreams rely on how well you manage the business’ operations to maximize it.

Information in this article is sourced from RAN ONE, Inc 

Businesses borrow money for a number of reasons. Additional capital may be needed to increase production capacity or to open a new office location. It might be necessary to borrow to expand into a new market or to upgrade the business IT facilities.

Whatever the reason, borrowing money involves the need to favorably impress the lenders you are approaching for finance. There’s never a guarantee that they will support your proposal, but there are some preliminary steps you can take to make a more convincing case to them.

Have all the necessary paperwork ready

Getting ready to apply for a loan is a lot like getting ready to sell a business. You’ll need to put together at least three years of financials including tax returns, financial statements, and lists of current payables and receivables. If the money is being borrowed to capitalize on an opportunity that will require the business to make significant investments, be prepared to present a comprehensive business plan that incorporates a model illustrating the projected results of making the investments.

How do your receivables and payables look?

Lenders like to see a business that gets its cash in quickly and doesn’t allow its accounts receivables to age beyond a reasonable period. Good businesses keep their cash flow under control by aggressively pursuing accounts receivable so they can pay their own creditors and take advantage of discount opportunities.

What is the value of your major assets?

Saleable assets are what a lender will look at to gain an idea of how much could be realized if the business has to be liquidated. Have an up-to-date list of all assets owned by the business and be able to show how they were paid for or how they have been financed.

Current and accurate valuations for all major capital equipment will need to be provided. These should be prepared by a third party that can give an independent estimate of their current value; what the business paid for something isn’t necessarily a guide to its present worth when depreciation is taken into account.

What is your current debt-to-equity ratio?

Lenders will loan different amounts to same-sized businesses in different industries. A high-tech business with $5 million worth of rapidly depreciating computer equipment will be viewed differently from a manufacturing business with $5 million worth of production machinery with many years of service life left in it.

You should have a pretty good idea of the amount you’re likely to be able to borrow before you approach a lender. If the amount is seen as ‘excessive’ because of the industry you’re in you may have to offer some of your personal assets as security for the loan.

What is your debt-to-income ratio?

Lenders know that loans must be paid back out of the profits of a business. Making loan repayments out of gross income can easily lead to cash flow shortages if the business isn’t suitably profitable. If the repayments are going to require too high a portion of the business’ profits it can also lead to problems.

A debt-to-income ratio of less than 50% is the norm, but less than 40% is preferable. This means that a business with monthly profits of $5000 should have no more than $2000 per month in repayments.

Both principal & interest repayments need to be covered

You’ll have to be able to show that the business can afford to make the loan repayments on top of covering all its regular expenses. This includes both the loan interest and a portion of the principal, depending on the duration of the loan.

When you prepare your case for any lender, keep all the above in mind. Get the business and your paperwork ready for the exercise; have a rough idea of how much your business is worth and of the amount you’ll realistically be able to borrow.

Information in this article is sourced from RAN ONE, Inc

A business depends on its cash flow to pay its bills. Cash flow can fluctuate greatly in smaller enterprises and there are often times when payments have to be made selectively. This is a strategy to serve as a general guide for paying bills at any time; it is especially useful for times when extra consideration has to be given to which bills are paid and which are delayed.

Prioritize every bill that comes in when it comes in

Maintain a register of all bills that shows their priority ranking, when they have to be paid, and of course whom to pay and how much is owed. Note how they’re to be paid – cash, check or electronic transfer. Set up a system that will enable you to see at a glance the bills due to be paid that day and the priority attached to each one.

Pay the most important bills first

Some creditors are more important than others. Those that are essential to carrying on the business have to be at the top of the pile; this is a list of those that are usually deserving of top priority status:

• Business insurance
• Business vehicle leases
• Governmental authorities - licensing and permits
• Income taxes
• Key suppliers
• Payroll and sales taxes
• Rental or mortgage payments on business premises
• Utilities – electricity, water, gas, telephones
• Wages

Silence isn’t golden

Simply not paying the less essential bills is not the right way to deal with them. It leaves your financial position in doubt and could trigger anything from hostile phone calls to collection action. Contact the creditor and explain that you’ll be late making payment but that payment will be made by a specific date. Raise the priority level of that payment accordingly and be sure you do make it on time. Ask each creditor if you can make partial payments for a period of time until your projected cash flow returns to normal levels. See if there might be some way of reducing or eliminating the debt by providing them with goods or services. If your business experiences seasonal cash flow fluctuations - for example, you generally experience a shortfall during the summer - you can negotiate with suppliers that bills will be paid within thirty days most of the year but within ninety days during the summer.

Meeting a temporary cash flow shortage

To meet a temporary cash flow shortage you may want to use one or more of the following strategies:

• Obtain a loan
• Arrange for a line of credit from a bank
• Accelerate the receipt of receivables due to you
• Bring forward a sale or other cash raising activity
• Acquire new items of equipment by leasing or other finance means
• Liquidate investments to raise cash

 Information in this article is sourced from RAN ONE, Inc

Managing cash is one of the most important tasks for any business owner and even if it’s not as glamorous as sales and marketing it is the job that makes sure the bills keep getting paid on time.

The cash position of a business at any time is easy to determine if you know just three figures - the cash in the bank, the cash that’s going to be received by the business, and the cash that has to be paid out.

It sounds simple, and it is, yet it’s amazing how many business owners don’t have a grasp of these three cash measurements. Whether you have a financial officer, or handle the accounts for your business personally, there are things you should be doing to keep on top of your cash position.

Know what’s in the bank at all times Banks can prepare statements at any frequency you request, and online banking is even easier and tells you instantly how much is in your account. Because this is the only source of funds you can instantly draw upon, you should be aware of your bank balance at all times.

Watch your receivables It’s not enough to know how much is owed your business - you also need to know when it’s coming in and if any payments are running overdue. This means ensuring that your debtors know when their payments are due, and having a credit policy that is firmly administered.

Know what you owe The other side of the coin is keeping track of what you owe and when payments have to be made. You might be paying bills too early and could hang onto cash an extra week or two without upsetting suppliers. You also need to be sure you’re taking advantage of any discounts on offer.

Monitor your cash position Just knowing the bulk figures of your bank account, receivables and payables isn’t enough to give you the full picture of your cash position though. You also need to incorporate the dates when receivables will arrive and when payments have to be made. This will help eliminate the possibility of being in a position where you have bills to pay while still nervously waiting for the cash to come in.

There are three other things to do that will help you get more benefit from your cash.

Put spare cash to work If you’re lucky enough to have surplus funds or are building up a strategic cash reserve put this money into a short-term interest bearing account. There’s nothing more wasteful than money just sitting in a non-interest bearing account.

Restrict your banking Don’t have too many accounts, and don’t deal with more than one bank. This makes it easier to know how much cash is on hand and puts you in a more favorable position with a financial institution.

Get expert financial advice Many small businesses have someone who ‘does the books’ and an accountant who sees the accounts once a year for the purpose of preparing a tax return. Unfortunately, this exposes the business to cash flow problems that can arise during the year. At least on a quarterly basis, have your business’ cash flow position analyzed by an accountant who can use their experience to spot developing problems in cash flow before they become too serious.

Cash management is an important responsibility of business ownership. It isn’t all that complicated but it does require regular attention and monitoring using cash flow forecasts.

Information in this article is sourced from RAN ONE, Inc