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Managing cash flow.

Managing Cash Flow

Three maxims for improving your association's bottom line.

Collect cash quickly. Hold cash wisely. Spend cash slowly. Master these maxims for sound cash management, and you'll soon see the results in your association's bottom line.

Collect cash quickly

Dues, a major source of cash for associations, offer many opportunities for collecting cash quickly. In billing members for dues and other member services, here are some simple but effective things you can do to expedite the flow of money into the association.

* Bill early. Generally, members should receive bills for dues several weeks before the start of their membership year. The earlier the bills are sent, the earlier most members will pay them.

It's also not necessary to wait a full month between dues follow-up reminders; follow-up billing can be sent every third or fourth week. There appears to be a correlation between the number and frequency of billings and the collection of receivables. This correlation drives marketers to send catalogs frequently and charities to send frequent solicitations. Each time a bill is received, some payment action is encouraged.

Avoid, if at all possible, having dues flow through some other organization such as an affiliate, before the association has access to the funds. While it is preferable to receive dues directly, if payment through an affiliate is essential, work out arrangements to get the dues as quickly as possible. These arrangements should be spelled out in an affiliation agreement, closely monitored, and enforced with fines and penalties. Also consider using wire

transfers of larger amounts received by an affiliate or maintaining a bank account (preferably interest-bearing) in the affiliate's location with advice of deposits to the account sent by fax so funds can be accessed promptly if necessary or desirable.

* Entice members to pay dues for more than one year at a time. One way to encourage multiyear dues payments is to offer a discount, which will be offset by the cash flow advantage your association earns through dues paid in advance.

* Make the invoice clear and simple to understand. If a member has to calculate dues or find and attach a document, it will delay payment. If the dues amount is based on the size of a member's organization, obtain the necessary statistical information from public sources to calculate the member's fee and send a bill with the amount due clearly indicated.

* Collect information separately, rather than as part of the dues payment. Asking members to complete a questionnaire or vote for association officers in addition to paying for their membership dues slows down the payment process. Weigh the desire to get members' views against the effect on your association's cash flow.

Even asking members for a donation adds another step to the time involved in paying their dues and thus slows down cash flow. If you decide to ask for a donation along with dues payment, you'll want to make sure the yield from these contributions more than offsets the cash flow slowdown for your association and that the same yield cannot be achieved through a separate solicitation.

* Enclose a pre-addressed envelope with your bill. This helps ensure payment reaches your association's correct address. A pre-addressed envelope also makes it easy for members to pay promptly. You may even want to consider enclosing a postage-paid envelope.

Each association activity that produces cash offers an opportunity for collecting cash quickly. For example, send out all forms of billing--such as that for advertising, supplies, or special services--as early as possible. These bills should show the amount due clearly and should make it easy for payment to be processed promptly.

* Offer prompt payment incentives. A 1 percent discount on bills paid within 15 days is one such incentive. Evaluate the cash flow advantage of these incentives in relation to their cost, because discounts can be expensive.

* Ask for payment of subscriptions, educational enrollments, supply orders, and so forth at the time these products and services are ordered. This improves cash flow and reduces the costly administrative process of follow-up billing. By avoiding the paperwork and postage of follow-up billing, you may be able to offer a discount for payment that accompanies the order.

* Accept credit card payment for telephone and mail orders. This simplifies the payment process. Weigh this advantage against the cost of collecting through a credit card.

* Use a lock box, whereby remittances are sent directly to a post office box number that is controlled by a bank. The bank immediately puts funds into your account and sends the necessary records to the association for processing dues or other payments.

Hold cash wisely

Good management always starts with a good plan, and good cash management starts the same way. By implementing the following tips, your association's cash needs can be met economically, and available cash can earn the best yield.

* Convert the association's operating and capital budgets into a cash budget. A cash budget shows when cash receipts and disbursements are expected to occur. This cash budget--or projection or plan--identifies when and for how long the association will have surplus cash to invest and when and for how long there will be short-term cash deficiencies.

Certain association expenses reflected in normal financial statements do not require a current outlay of cash. For example, depreciation is not a current cash outlay. However, some expenses that are not reflected in the association's financial statements must be paid. Payment of principle on debt is one example. The cash budget, therefore, must consider the difference between operating expenses and cash flow.

* Compare your actual cash flow with your association's cash budget. Regular reports provide valuable management information for monitoring current cash position and help improve the cash planning process, making it a more accurate and more useful management tool for the future. The cash flow report should be part of the normal periodic set of financial statements.

While a traditional cash flow report is valuable, it is usually too late and too infrequent to serve as the primary report for cash management. More frequent and prompt reports are often needed, with some information provided daily. Monitoring of dues collection is important, and the purchasing procedure should provide information about near-future cash obligations.

* Calculate certain ratios, particularly liquidity ratios. A valuable liquidity ratio is the acid test ratio--the ratio of cash to current liabilities. It is reasonable to set specific acid test ratio objectives and regularly monitor the cash position with this simple calculation. Cash on hand divided by daily cash disbursements (total expenses, less non-cash expenses such as depreciation divided by 365) represents days of cash on hand and is also a valuable indicator of the organization's cash position. Days of revenue in accounts receivable and average payment period are other valuable liquidity measurements. These ratios should be measured regularly, and trends and absolute levels evaluated. For example, if days in receivables are going up, the acid ratio test is going down, and the average payment period (how long it takes the association to pay its bills) is going up; the warning flags are out and prompt management action is essential.

* Establish precautionary reserves. Recognize that payroll and bill payments are not paid with cash expected to be received, but rather must be met with cash on hand. Therefore, there must always be sufficient cash to meet these requirements. The amount of an association's precautionary reserves depends on its credit standing, the amount of assets that can easily be converted into cash, and its willingness to accept risk.

* Put cash into an interest-bearing account as quickly as possible. Compare banks in your area. Deposits can be made directly into an interest-bearing account with transfers made periodically to an imprest account to cover disbursements, or funds may be transferred from a noninterest account into one that pays interest, a process sometimes called a "sweep." (An imprest account has a fixed balance in the financial records of the association. Funds transferred into the account equal the checks drawn on the account.)

Imprest checking accounts can help you manage cash. For example, you may transfer the total of all payroll checks from an interest-bearing account to an imprest payroll account each pay day and draw the individual paychecks on the imprest account. Similarly, if most vendor payments are processed on the first and the fifteenth of the month, then transfers are made from the interest-bearing account to the disbursements account when the checks are issued to vendors.

Consider the speed with which checks are cashed, and make transfers to the imprest account gradually to match the timing of when the checks are actually cashed. Banks may simply automatically transfer the amount of checks that are cashed from the interest-bearing account to the payroll or disbursement imprest account daily to cover checks cashed. Your goal is to have zero balances in checking accounts that don't bear interest.

* Negotiate specific terms with your bank. Banks sometimes require customers to maintain a minimum balance in their checking accounts, but these arrangements can be negotiated. Banks may ask that services, such as a lock box, be paid by maintaining a certain balance--sometimes called a compensating balance--in your accounts. It may be more economical to pay a fee for these services to avoid minimum or compensating balance requirements.

Even though a checking account may bear interest, a higher interest rate on other forms of temporary investments may be available.

* Balance security and liquidity investments. Security should be a priority, especially for short-term investments; thus, government securities or insured accounts are often good candidates for first consideration.

* Diversify investments to minimize the risk of a loss. If several different investments are held and only one goes sour, the adverse effect is minimized for your organization.

* Invest idle cash temporarily. It is possible to invest for just a weekend. In one year, weekends account for 144 days, or almost 3 1/2 months.

* Borrow carefully. The converse of investing excess money at the highest interest rate possible is to meet short-term cash needs at the lowest cost possible. Your association can establish a line of credit so it is assured of short-term cash and knowing the rate of interest it must pay to meet such requirements.

Borrow at favorable interest rates for long periods of time by using receivables as collateral. This is sometimes referred to as pledging receivables. This may be more attractive collateral than more specialized and less liquid assets, such as buildings.

Weigh the cost of short-term borrowing against the return on longer-term investments. Avoid cashing in longer-term, high-yield investments if cash needs are only for a short period. The cost of borrowing for a short period may be less than the investment income earned during the same period.

Spend cash slowly

It sounds simple, but spending cash slowly is the third key to successful cash management. Here are some tips.

* Make payments to vendors as near to the due date as possible. Although bills need not be paid immediately upon receipt, payments should not be made so slowly that vendors question the credit worthiness of your association.

If a vendor offers a discount for prompt payment, pay promptly enough to take advantage of the discount. If, for example, the association can afford to pay promptly and earn a 1 percent discount for paying within 15 days, it is earning the equivalent of a 25 percent return on that prompt payment. If it is necessary to borrow money to make the payment promptly, any rate less than 25 percent a year is financially advantageous.

* Manage assets carefully. For example, an association must control its inventory. Thus, any amount not spent on inventory will be cash in the bank. The availability of cash when an asset is leased, rather than purchased, is an important consideration in choosing among these alternatives. The effect on cash flow needs to be considered in virtually every purchase an association makes.

In summary, cash management can be improved gradually and cumulatively by adopting a variety of these initiatives. Good cash management uses resources the association already has and smartly works them to improve the financial position of the organization.

Ronald R. Kovener, CAE, is vice president of the Healthcare Financial Management Association, Washington, D.C.
COPYRIGHT 1991 American Society of Association Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:includes related article
Author:Kovener, Ronald R.
Publication:Association Management
Date:Feb 1, 1991
Previous Article:Diversified revenues spell success.
Next Article:The new rules for expense reporting and reimbursement.

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