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Cash Flow Impacts.

"Never spend your money before you have it," wrote Thomas Jefferson to his granddaughter--one of his 12 "Canons of Conduct in Life," In life, this is makes perfect sense; however, in the field of credit management, credit professionals need to do just that--spend or sell products and services without being paid right away. Making the decision to grant credit or give up a product or service, knowing there is the possibility of not being paid, is difficult. Nothing is ever 100%, yet there are tools creditors can use to help make the decision of granting initial credit or additional credit a little bit easier, Cash flow is one such tool.

"Cash flow reflects the lifeblood of any business," said Dan Falvo, director of credit and collections with Airgas USA, "Profit and loss, the balance sheet--all well and good, but there are other figures in there. Cash flow is reflective of profits and working capital fluctuations, and it's a better read on the health of a company."

In a recent report, "The State of Small Business Cash Flow," Intuit QuickBooks took a deep dive into what they called "the lifeblood of success" and found a majority (61%) of small businesses regularly struggle with cash flow. Late payments are one of the biggest factors affecting cash flow for buyers and sellers. Only 41% of business owners said they never have late payments, and 4% of business owners are receiving at least half of their payments late. Almost a third (32%) of small business owners that have reported cash flow issues said they have been unable to make payments on loans, or to vendors, employees and themselves.

"Every day, small business owners fight to deliver amazing products and services for their customers, but--with 50% of small businesses going out of business within five years of opening their doors--the odds are stacked against them," said Alex Chriss, general manager, small business and self-employed at Intuit, in a release, "The top reason for failure is the cash flow crunch and lack of flexible options."

Small businesses in the U.S. average more than $53,000 in outstanding receivables, and a third estimate having at least $20,000 in outstanding receivables. This results in a third of small businesses waiting more than 30 days to get paid by banks, clients, customers and vendors, However, payment processing is the biggest factor when it comes to impacting cash flow--two-thirds are affected by the speed of payment processes, while the remaining third said nonpayment/slow payment was the largest cash flow inhibitor.

Larger clients and customers were among the least likely to pay smaller businesses on time, while smaller, family and friend clients and customers were among the most reliable payers. Nearly two out of five business owners said they are refused payment at least once per month--10% hear it at least once a week.

Small businesses have also started using automation for business operations, but almost a fifth are not automated at all. The top answers for businesses that have not automated business operations: no need, too small; lack of knowledge; and too expensive. Meanwhile, 30% of businesses are highly automated. The top use of technology was for payroll, closely followed by accounting, bookkeeping and inventory.

"Cash flow, at least in the printing business, is very difficult," said Sanjay Sakhuja, owner and CEO of DPI, in the Intuit release. "You have to finance projects, payroll, materials, utilities and fixed overhead yourself in order to get the job. And of course, there's a credit risk, Any time you offer somebody credit, there's a chance they might not pay you, And that is a constant challenge for us."

If a potential or current customer's cash flow is negative or trending downward over a certain period, that is a possible sign of things to come, Creditors can use cash flow as a forecaster of payments. Seeing that cash flow of a company is positive or in the black is not enough for creditors risking their company's products and services. "We're trying to look at predictability," said Alaina Worden, CBA, assistant corporate credit manager with OrePac Building Products. "Cash flow gives a quick idea of how a customer is spending cash--it doesn't lie." OrePac tracks cash flow to follow where a customer's money is tied up, which can help determine if payments for product will be coming their way.

Worden uses cash flow to determine if a company will be able to cover immediate expenses and other liabilities coming down the pipes. "We want to make sure we are in the right position in case the market takes a hit," she said.

"Negative cash flow means my customer cannot come up with the money and may struggle to pay me," said Kathy Wilson, CBA, credit manager with AFX Lighting. However, she is willing to take a risk with a credit line on a small amount despite a negative cash flow, yet not on open terms. It will more likely be full pay or partial pay in advance.

Worden looks at cash flow as a "package deal," referring to cash flow from operations, investing and financing, to try and have the fullest picture possible. If a negative number does come up, "it's not an all out 'we're not going to sell.'" That is why it is called a credit investigation--find out why cash flow is negative or trending downward, even if operations are down, it doesn't necessarily mean a red flag, It could be an anomaly, she said, referring to the five Cs of credit, "We have to look at the entire portfolio of a customer, Even a healthy balance sheet warrants investigation, You want to be able to see where the money is flowing and make your own independent credit decision."

Derek Tribble, CBA, wholesale credit manager with MFA Incorporated, mentioned capacity as the "C" he leans on most. While capacity shows a customer's ability to pay short-term debt, Tribble said, "cash flow shows the ability of the company to manage their business--their preparedness." It is also a way to look at long-term stability and liquidity of a customer. Tribble would be willing to review customers with negative cash flow, as well, on relationships and based on trust,

The key items to remember when reviewing cash flow according to Falvo are accounts receivable, accounts payable and inventory, but he focuses on AR. He also relies on cash flow from operations since "it tells how things are going day-to-day." Customers with positive cash flow are moving things properly and collecting money timely while managing and moving inventory. "It's like lubricating an engine,"

"Cash flow is a pivotal point to continue to move on and do day-to-day activities--it's the heartbeat." said Worden.

Michael Miller, managing editor, can be reached at
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Title Annotation:SELECTED TOPIC
Author:Miller, Michael
Publication:Business Credit
Date:Apr 1, 2019
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