Thursday, November 25, 2010

How to use Powerful Accounting Practices to Improve a Business

The below blog provided by Jeffrey D. Bronswick of RP& Co.

Whether you are buying, selling, starting or growing a business, cash flow planning is critical to the success of any business. Businesses with proven techniques for cash flow planning are more successful and therefore more valuable than their competitors. If you are buying a business, make sure these practices exist. If you are selling, identify areas that need improvement and fix them in order to increase the value of your business in the eyes of a prospective buyer.

Planning should be done in advance and for at least one year out. The cash flow plan should be closely aligned with the strategic plan for the business. The purpose behind the plan is to:
1. Predict when, where, and how cash needs will occur
2. Predict what the best sources are for meeting additional cash needs
3. Be prepared to meet these needs when they occur (it helps to keep good relationships with bankers and other creditors)
4. Plan business profitability and growth

The starting point for avoiding a cash crisis is managing the balance sheet. Collection of accounts receivable and payments to vendors are two areas that require daily attention. A well run business will develop both short-term (weekly, monthly) cash flow projections to help manage daily cash, and long-term (annual and up to 5 years) cash flow projections to help develop the necessary capital strategy to meet business needs.

Remember, the plan should be by week or by month. NOT by year. Many businesses make this mistake. Most businesses have cycles and planned and unplanned major expenditures, so you need to see the highs and lows in the business on a weekly or monthly basis. If you plan properly, the cash needs will be very apparent on the cash flow projection in a given month. If you know in advance when the cash needs of your business are the highest, it will trigger actions on the part of the business for capital retention, cost reduction and bank borrowing availability.
How does a well-run business deal with these ups and downs? By negotiating in advance…
1. Vendor payment terms
2. Customer payment terms (and prepayments if warranted by the business)
3. Bank lines of credit
4. Long term debt
5. Equity capitalization

If the business has not prepared cash flow projections before, preparing historical cash flow statements and balance sheets will help you gain an understanding about the past cash flow performance and your potential needs in the future.

The process of planning future cash flows is very time consuming, but if it is done correctly, it will not only save you money, it could save your business.

Jeffrey D. Bronswick is President of RP&Co. - Certified Public Accountants located in Buffalo Grove, IL. Jeff works closely with his clients in helping guide their growth and financial success, assisting them with operational and financial issues, and in charting tax strategies to maximize their after tax income. Jeff received his Bachelor of Science in Accountancy (Cum Laude and with University Honors) from Northern Illinois University in 1988.

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