Personal Finance, Loans & Insurance

Cash management in this economic environment is crucial. Cash is the life-blood of any business. As the saying goes, “Cash is king”. With so many banks tightening credit standards due to what’s happening in the credit markets or within their own lending portfolios, it is crucial that businesses fully understand their cash needs IN ADVANCE and make adjustments to their operations to ensure that cash is available. Otherwise, companies may find themselves in a liquidity crisis –unable to meet payroll, pay suppliers, or pay subcontractors – which leads to bankruptcy or an operational shutdown.

Cash is NOT income. Let’s assume you enter into a $200,000 contract to provide interior fit-out services which will take you ~30 days to complete. According to the contract you submit invoices once per month (fairly standard in commercial construction) on the 25th and the general contractor has 30 days to pay you. You commence work on October 1. Before you begin, you buy materials such as drywall, nails and other supplies. You pay your tradespeople and foremen every 2 weeks so a check for their work is due on October 14. You buy materials and supplies for the last phase of work. You submit your invoice for $160,000 for work completed by the 25th, as per the contract. You pay your tradespeople again on Oct. 28. Assuming you have properly estimated the job and had no cost overruns, you have already spent IN CASH $140,000 – $160,000 on materials and supplies, equipment or equipment rental, personnel and miscellaneous.

Now you must wait until November 25 to receive payment. However, you only billed for 80% of the project, so you will only receive $160,000 maximum. You completed the job and bill for the remaining 20% or $40,000 by November 25th which you will receive by December 25. That assumes there is no retainage. With government contracts or bonded contracts that retainage is typically 10% or $20,000 in this example. If your contract calls for retainage, then you may have to wait several months before you receive the final $20,000.

So you spent $140,000 – $160,000 of your money in October: perhaps $30,000 the 1st week, $55,000 the 2nd week, $20,000 the 3rd week, and $55,000 the 4th and final week. You do not receive payment until November 25. You have a cumulative negative cash flow from this job of -$30,000 the 1st week, -$85,000 the end of the 2nd week, -$105,000 the end of the 3rd week, and -$160,000 the end of the 4th week. This negative cash flow or cash flow shortfall continues for four more weeks until you receive your first check of $160,000 for the project at the end of the 8th week. Upon payment your cash shortfall goes to 0. However, if you had a 10% retainage, you’d only receive a check for $144,000 and you’d still have a negative cash flow on the project of -$16,000. A little over four more weeks later you’d receive the second and last payment of $40,000 (again, assuming no retainage).

Yes, on this job you have a 20-30% operating profit. This looks great on paper. However, you also have negative cash flow for as long as 12-13 weeks or as little as 8 weeks and you are likely struggling financially trying to come up with cash to pay your people and your suppliers. We have all heard of subcontractors who went bust during a job and another one had to come in and take over. This unplanned cash flow shortage is the primary reason construction companies go out of business. If you do not have overlapping jobs with payments coming in that can cover the cash flow shortage, your business is hurting. You must engage in this type of budget planning and analysis before each and every job in order to plan your cash needs accordingly.

One way to mitigate the cash outflows is to get terms from your suppliers on your materials and supplies. If you can get 30-45 day terms, you can reduce both the amount of the negative cash flow and the length of time cash flow is negative. Another way is to use subcontractors instead of trade personnel and subject them to the same payment terms you are under with the contractor. Thus, instead of paying tradespeople every 2 weeks, you pay the subcontractor within 30 days of the submission of the invoice. In both these instances you align your cash outflows with your cash inflows as a way of negating or minimizing negative cash flow.

Of course, many subcontracts stipulate that a certain percentage of the work must be completed by your company which thereby places a defacto limit on the amount of work you can subcontract. In addition, quality and safety are often a concern when you utilize a high number of sub-subcontractors whose performance and sourcing you cannot directly control. Shoddy work leads to missed completion dates and additional expenditures tied to correcting mistakes. Consequently, over-dependence on sub-subcontractors can lead to cash flow shortages and other operational issues. This is yet another reason for the demise of some subcontractors while carrying out a contract.

A line of credit can help you weather cash shortages by leveraging working capital. Working capital is short-term assets – short-term liabilities or typically cash + account receivables – account payables – payroll payables. You can use your line of credit to pay payroll, rent equipment, or purchase supplies when you cannot get terms. If you do not have a line of credit with a bank, pursue one. Cultivate a strong relationship with a banker at Vice President (or equivalent) level and above. In these economic times with the credit market roiling and many banks dealing with issues in their own lending portfolios, strong relationships play an even larger role in obtaining credit than a year ago.

You can also pursue a line of credit with an accounts receivable financing or factoring firm. These charge much higher rates than banks but often are a good source of capital if you are growing significantly or garner a much larger contract than is typical for your company. Banks use your company’s three-year historical performance to provide credit lines so large increases in revenue over a short period often do not translate into a credit line increase for a few quarters. A receivables financing firm will provide a line based on your historical financials and the credit-worthiness of your customer. Unfortunately, since construction contracts and the attendant receivables often have the retainage provision, many receivables financing firms do not provide credit lines to construction companies. When they do, it is often at higher interest rates to compensate for the higher risk. Rates can be as high as 4-6% per month – assuming a 30-day payoff on the receivable – which is 48-60% per year!!! Sometimes you have to take what you can get but do so only for very short periods with a plan of action to obtain other financing at much better terms within the next 4-6 months.

To summarize, cash is king always but definitely in restricted capital environments. Money is still available but it takes longer and requires more creativity and perseverance to access it. Therefore, plan your cash needs and budget your cash resources as much as possible. Know your daily spend rate, be able to quickly determine how much cash you have on hand at any given time, know your expected operating cash flows and the timing of those cash flows. If you do not, you are headed for trouble. Or you may already be troubled –stressed out, continually seeking money from somewhere, continually trying to increase revenue even though you lose money with each sale. Stop, determine your cash outflows and inflows on a per project basis, and make decisions based on that information. In this market, you may have to jettison slow-paying, high complaint customers. When cash is king, these customers drag down your bottom line.

We all have different goals and responsibilities in our lives. A student, married couple, retired person may have different goals for their future. This all need proper financial planning. But when we think of long term goals, financial planning needs to be more systematic which needs a finance consultant. Finance consultant is a person who provides consulting services to the clients to minimize their risk and monetarily maximize their investment money. The main purpose of finance consulting is to assist clients in the planning and arrangement of their financial affairs, such as savings, retirement provisions, tax treatment and wills. He may help the clients to invest for both long and short term goals. It is the finance consultant’s duty to determine the clients’ goals and risk tolerance and then to recommend appropriate investments.

Hence, a finance consultant should have the knowledge in almost all the fields like budgeting, taxation, forecasting, allocation of assets, tools and products etc. He must possess certain important requirements such as excellent negotiation and communication skills, ability to explain complex matters to clients, ability to solve financial problems tactfully as well as easily, and good command over subjects like mathematic, computer, and statistics, extensive knowledge on different types of products, accuracy, and trustworthiness and honesty. The <a rel=”nofollow” onclick=”javascript:pageTracker._trackPageview(‘/outgoing/article_exit_link’);” href=http://www.investguidepro.com>finance consulting</a> services may differ by clients, their business, their requirements and financial capabilities. Generally, services include collecting and organizing important data like client’s financial statements, tax and credit reports to get the current financial status, analysis and determination of data by keeping in mind the immediate financial requirements of clients, supervising the progress of the plan and making necessary modifications in the plan to suit the present financial situation of the client etc. Different types of finance consultants include fee-only consultants and commission-based consultants.

However, it is vital to make a thorough investigation regarding the reputation and service rendered by a finance consultant you have chosen. You must ensure that he should be licensed and registered. You can easily find an expert with the help of sources such as the internet, yellow books, magazines, and reviews.

In today’s market conditions and cut-throat competition it is very hard to survive and get success upon that. So, the change is vital in all factors which are important for the success of any organization and corporations. Good foresight, proper planning and execution, human resources and constant research are the main contributing factors in success of any corporation. However, corporate banking is also one of those important factors that are to be considered for the growth and development of any corporation. Corporate banking requires a huge knowledge base and experience to service all requirements of commerce and industry. It includes a huge selection of commercial and transactional products and services. It also provides the comprehensive and sophisticated services that a large company requires in today’s business world. However, most of the top banks have a separate corporate banking section specially to cater the needs of companies that are different in requirements and scale as compared to an average small to medium enterprise. Some of the <a rel=”nofollow” onclick=”javascript:pageTracker._trackPageview(‘/outgoing/article_exit_link’);” href=http://www.investguidepro.com>corporate banking</a> services may include specialist bank accounts like community banking, school banking, private banking, agricultural accounts or specialist mortgage etc. Some may have specific finance schemes for certain projects like farm loans, GP surgery expansion etc. Client call account allows you to hold your clients cash separately from your business cash. A solicitor might put the deposit for a house which is paid on exchange of contracts in such an account.

Hire purchase or lease purchase schemes are available where items of large capital value can be bought, for a set rate each month, over an agreed period of time. Some of the typical corporate banking products and services include corporate funding or financing, bank guarantees, syndication services, foreign exchange services, investments, stocks, comprehensive internet banking facilities etc.To be concluded, corporate banking plays a vital role in business or corporate world without which one can’t achieve the desired goals.

Finance training and development is a crucial skill in the business environment. Failure to implement and maintain basic finance strategies acquired through education and training can lead to a number of fiscal disasters including employee theft. Many companies are caught off guard when they discover that a trusted bookkeeper, accountant, CFO or even a project manager has been skimming money for years.

Here are some sound financial strategies that are valid for organizations of any size:

· The person who approves invoices should never be the same person who writes checks.

· The person who writes checks should not have check signing authority. If this is not practical, the organization should establish a check limit above which two signatures are required.

· Unannounced random audits should be conducted on payables. Invoices should be matched with purchase orders. The actual product or service purchased should be physically accounted for or traced back to the ultimate end user.

· Unissued blank checks should be physically inventoried, from time to time, to look for unexplained missing checks. Keep blank checks locked up.

Finance training education points that one way to control finances is to inspect carefully every business transactions or purchases acquired by your company. Every purchase from vendors greatly exceeding the average amount spent with that vendor should always be scrutinized.

· The petty cash account should be reconciled against receipts at least monthly.

· Travel and employee expense forms, as well as company credit card statements for cards issued to employees, should be scrutinized and reconciled before payment is made.

· Review all fiscal polices at least quarterly and make adjustments when necessarily.

Remember — the easiest way to stop money from disappearing is to tightly control how it is disbursed. You can do this if you can understand better the flow of finances in your company and enroll in online teaching or distance education in finance with AOT. This will certainly help you achieve your goal.

Borrowing money is as American as apple pie. Americans borrow money to purchase houses, to finance automobiles, and to pay for luxury items on their credit cards every day. It is a rare individual that can pay all cash for their house, their car, or their credit card bill every month. The U.S. economy thrives on credit because of the recycling of cash when these purchases occur. America is an economic powerhouse, partly because collectively we borrow so much money to have things today, instead of saving the cash to buy these items some day, if ever, in the future. Economic theorists are of the opinion that when you purchase a house, the cash recycles about seven times: to the realtor, to the title company, to the mortgage broker, to the lender, the butcher, the baker and the candlestick maker, and so forth.

We live in the land of opportunity. You do not need a college degree or pedigree to become an entrepreneur. All you need is the ability to organize, manage, and assume the risks of a business with a sufficient amount of cash to fund the business.

Borrowing money is the American paradigm for success for individuals and for businesses. According the American Heritage Dictionary, a “paradigm is:

1. One that serves as a pattern or model.

2. A set or list of all the inflectional forms of a word or of one of its grammatical categories: the paradigm of an irregular verb.

3. A set of assumptions, concepts, values, and practices that constitutes a way of viewing reality for the community that shares them, especially in an intellectual discipline.

Usage Note: Paradigm first appeared in English in the 15th century, meaning “an example or pattern,” and it still bears this meaning today: Their company is a paradigm of the small high-tech firms that have recently sprung up in this area. For nearly 400 years paradigm has also been applied to the patterns of inflections that are used to sort the verbs, nouns, and other parts of speech of a language into groups that are more easily studied. Since the 1960s, paradigm has been used in science to refer to a theoretical framework, as when Nobel Laureate David Baltimore cited the work of two colleagues that “really established a new paradigm for our understanding of the causation of cancer.” Thereafter, researchers in many different fields, including sociology and literary criticism, often saw themselves as working in or trying to break out of paradigms. Applications of the term in other contexts show that it can sometimes be used more loosely to mean “the prevailing view of things.” The Usage Panel splits down the middle on these nonscientific uses of paradigm. Fifty-two percent disapprove of the sentence The paradigm governing international competition and competitiveness has shifted dramatically in the last three decades.”

For more dictionary information please see: The American Heritage® Dictionary of the English Language, Fourth Edition Copyright © 2000 by Houghton Mifflin Company.

Published by Houghton Mifflin Company. All rights reserved.

What does this have to do with accounts receivable financing?

Banks exist primarily to loan money to people and businesses, on a safe and sound basis according to federal banking regulations. The banking paradigm for businesses involves offering checking and savings accounts to take money in, and offering various types of business and personal loans to “get the money out”. Their goal is to make a profit on your cash for the bank. To qualify for these loans you have to prove, to the bank’s satisfaction, that you have the clear and present ability to repay these loans. If you are a startup company, a company that is growing very rapidly, or an established company that is affected by a sudden negative event, the banking paradigm may not work for you. Perhaps, you need to think differently; perhaps your perspective is “inside the banking paradigm box” and you need an alternative.

What is inside the box thinking? According to ‘Thinking Outside the Box’? By Ed Bernacki Published April 2002:

“Thinking inside the box means accepting the status quo. For example, Charles H. Duell, Director of the US Patent Office, said, “Everything that can be invented has been invented.” That was in 1899: clearly he was in the box!

In-the-box thinkers find it difficult to recognize the quality of an idea. An idea is an idea. A solution is a solution. In fact, they can be quite pigheaded when it comes to valuing an idea. They rarely invest time to turn a mediocre solution into a great solution.”

Mr. Bernacki distinguishes “inside the box” thinking vs. “thinking outside the box” as follows:

“Outside the Box

Thinking outside the box requires different attributes that include:

• Willingness to take new perspectives to day-to-day work.

• Openness to do different things and to do things differently.

• Focusing on the value of finding new ideas and acting on them.

• Striving to create value in new ways.

• Listening to others.

• Supporting and respecting others when they come up with new ideas.

Out-of-the box thinking requires openness to new ways of seeing the world and a willingness to explore. Out-of-the box thinkers know that new ideas need nurturing and support. They also know that having an idea is good but acting on it is more important. Results are what count.”

If your B2B business does not have enough bank credit to expand at the rate you need, or if your B2B business cannot take advantage of growth opportunities because of lack of funds, you may need to think differently: think outside the box. Think of using the virtually unlimited financing that is available from accounts receivable financing.

To think differently, you may need to overcome the two most common “inside the box” concerns regarding accounts receivable financing.

Objection: “Our customers will not want do business with our company if they know we are dealing with a commercial financing company to finance our accounts receivable”.

Think Differently: Accounts receivable financing allows you to offer credit terms, like the bank. Many businesses prefer to resell your products or services and earn a profit before they have to pay you for your product or service. Accounts receivable financing generally involves notification to your customers of the arrangement to “manage” your receivables; and verification from your customers that your product or services were “satisfactory”. From your customer’s point of view, someone in their account’s payable department is changing the “pay to” portion of their check to the address of a commercial finance company. Usually the check is cut payable to you and sent to a P.O. Box of the commercial finance company. In certain situations, notification may not be required at all; this is called non-notification factoring.

Objection: “Accounts receivable financing is too costly”.

Think Differently: Accounts receivable financing is a paradigm for success; you will have the necessary working capital you need to fulfill larger orders by accelerating your cash flow. You will need a gross margin of 20% or more, in general, for this type of financing to make economic sense. There is an inverse relationship between the cost of financing and the size of your credit facility: the larger the credit facility, the lower the cost. In other words, the fees and rates will be less for $500,000 per month than for $25,000 per month.

The bottom line: Accounts Receivable Financing- Think Differently! is intended to help you think “outside the box” and become more profitable. One tried and true paradigm for achieving this result as an entrepreneur with a B2B business is accounts receivable financing.

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