You Don’t Have to Be Shot Because You’re Cash Strapped
by Myrna Rodriguez-Co
A movie called “Mousehunt” tells of a business owner who, finding himself short of cash with which to meet the month’s payroll, called in his employees to a meeting to explain why they would not get paid in the weeks to come. The summoned workers came into the owner’s office with cocked guns, apparently ready to shoot him. The business owner, realizing his mistake just in time, escaped through a window.
That filmic episode, while meant to be comic, underscores the fact that in business, cash is “king” and the cash flow or managing it well is key to keeping peace and prosperity in the “kingdom.”
Which small business does not find itself, from time to time, in a similar situation? – unable to meet the week’s payroll, the months’ utility bills, the quarter’s loan amortization, tomorrow’s promised payment to a supplier? But very few businesses would have owners cockeyed enough to think people would readily understand his dilemma.
Cash flow needs to be managed because, as all of you, businessmen know, cash outflows and inflows will almost never occur at the same time. Cash inflows, in fact, have an uncanny way of lagging behind outflows for as long as weeks and months. This shortage is known as the cash flow gap.
Experiencing a cash flow gap occasionally is par for the course. It doesn’t necessarily mean your business is on the verge of collapse. Even the best-managed companies are at the mercy of seasonal fluctuations.
How does one improve cash inflow vis a vis cash outflow? Let’s hear it from the experts – the small businessmen themselves.
Tom Ranada, proprietor of Uptrend, an importer-distributor of vitamins and food supplements, fills up an occasional cash flow gap by buying on credit. He also gives attractive discounts or rebates on volume sales in order to perk up sales revenues. He also advises cash- strapped entrepreneurs to look around the workplace. Are there surplus or idle equipment or furniture that can be sold? Are there waste materials or by-products that be converted into cash? Tongue in check he adds: “Perhaps the owner has extra time to handle a part-time job.”
Felicitas Borlongan recalls that in the early stages of operationalizing her auto air-conditioning business, Abacus, which she owns with her husband, she barely had cash to buy inventory. What they did to cope with the shortage was to buy just enough motor parts to replace those which were used up on a given day.
Ariel Claudio Co, owner-manager of Innobuild Construction says he takes the trouble to maintain cordial if not friendly relations with his suppliers. If they trust you, he says, you can purchase your materials and supplies on credit rather than cash. If they have become your friends, they give you very generous terms he adds smiling. This has enabled the young engineer-contractor to reserve his cash for his other capital requirements that he cannot defer, for example, paying his work crew.
Look also at the possibility of getting your clients or customers to pay you in advance for their orders, Co advises, but this isn’t likely to happen unless they like your work or services and you are in very good terms with them, too.
Maldwyn de Pano, President of Design Plus, Inc., a printing shop, also owns or co-owns a string of other companies, including a publishing house, a magazine, and a recording studio. The network of enterprises under his control gives him much elbow room for capital redistribution. He has the authority to transfer funds, up to a certain amount, from a firm that enjoys cash surplus to another that suffers from a deficit. De Pano has gone a long way from the days that he was a struggling upstart in the printing business when all that he could do to fill a cash shortage was to borrow money from his parents, relatives or friends.
If you ask business consultants, on the other hand, they will tell you that the key to improving your cash flow is to delay cash outflows for as long as possible. They’re not saying that you should renege payment: you still need to meet your payables on time. But holding out as long as you can allows you to maximize every peso in your own cash box.
When you realize the benefits from delaying your cash outflow, then you would have taken the first step in cash flow management.
A fundamental for the proper management of cash outflows is to track and manage your business liabilities. Another basic rule is to pay your bills on time but never before they are due.
The Business Owner’s Toolkit names three tools for managing your outflows: trade credit, trade discount, negotiating payment terms with suppliers and vendors or deferring expenses; and using the “float.”
Trade discounts is a percentage taken off the total amount of your supplier’s invoice if you pay within a specified period of time. This is typically 1 or 2 per cent if you make payment within 10 days. It is obviously a contradiction to the basic rule of delaying cash outflows. In most cases, you are better off to pay the bill early and take advantage of the trade discount.
Trade credit is what you get when your supplier allows you to defer cash payments for goods or service in exchange for your promise to pay them in the future. It is essentially an interest-free short-term loan.
Negotiating payment terms presumes that some of your suppliers may be willing to extend to you longer credit terms on the basis of: your past and present business relationship with them, your past payment history and perceived credit worthiness, and prospect of securing a larger order or your continued patronage.
Finally, you may try to use a somewhat risky way of handling a temporary cash shortage called the “float” -- which is the difference between when your check is written and when it is cashed.
So, you see, there are many options for the cash-strapped entrepreneur other than facing a shooting squad of irate employees.
(For inquiries, please e-mail info.issi@up.edu.ph.)
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