Question

Lance, Art, and Wayne have joined together to open a law practice but are struggling to manage their cash flow. They haven’t yet built up sufficient clientele and revenues to support their legal practice’s ongoing costs. Initial costs, such as advertising, renovations to their premises, and the like, all result in outgoing cash flow at a time when little is coming in. Lance, Art, and Wayne haven’t had time to establish a billing system since most of their clients’ cases haven’t yet reached the courts, and the lawyers didn’t think it would be right to bill them until “results were achieved.”

Unfortunately, Lance, Art, and Wayne’s suppliers don’t feel the same way. Their suppliers expect them to pay their accounts payable within a few days of receiving their bills. So far, there hasn’t even been enough money to pay the three lawyers, and they are not sure how long they can keep practicing law without getting some money into their pockets.

Can you provide any suggestions for Lance, Art, and Wayne to improve their cash management practices?

Accounting Question

Answer 1

LANCE, ART, AND WAYNE TO IMPROVE THEIR CASH MANAGEMENT PRACTICES IN SIMPLE WAY THAT EVEN IF YOU'RE A SMALL BUSINESS OWNER, IT'S VITAL TO UNDERSTAND YOUR CURRENT CASH POSITION, AND TO KNOW HOW TO KEEP CASH FLOWING SO THE HEART OF YOUR BUSINESS KEEPS BEATING

CREATE A CASH-FLOW FORECAST:FORECAST ALL PROJECTED INCOME ALONG WITH WHEN YOU EXPECT TO RECEIVE IT. COMPARING THAT TO PROJECTED FIXED AND OTHER EXPENSES WILL HELP IDENTIFY PERIODS WHERE THERE'S POTENTIAL TO SPEND MORE THAN YOU MAKE. THAT, IN TURN, ALLOWS YOU TO PLAN FOR THOSE GAPS.

MAKE MONITORING YOUR CASH-FLOW STATEMENT PART OF YOUR DAILY ROUTINE. “IT DOESN'T NEED TO BE A MAJOR PART OF YOUR DAY—JUST A CHECK-IN TO MAKE SURE YOU KNOW HOW YOU'RE DOING,

COLLECT MONEY OWED BEFORE PAYING YOUR BILLS:RATHER THAN WAIT UNTIL THE FIRST OF THE MONTH TO BILL A CLIENT, INVOICE THE JOB AS SOON AS IT'S DONE. THEN MONITOR THE PAYMENT TO MAKE SURE IT ARRIVES ACCORDING TO CONTRACT TERMS. IF IT DOESN'T, TAKE ACTION.

CONTINUALLY CUT EXPENSES: THINK LEAN—NOT JUST DURING TOUGH TIMES, BUT ALWAYS. START BY EXAMINING ALL RECURRING CHARGES TO SEE WHERE YOU CAN SAVE.

GET A LINE OF CREDIT BEFORE YOU NEED IT: A LINE OF CREDIT PRESERVES CASH FLOW IN LEAN TIMES, HELPING YOU NOT ONLY SURVIVE BUT THRIVE IN DOWNTURNS. IN ADDITION, STRONG BUSINESS CREDIT CAN AUGMENT YOUR CASH FLOW OVER TIME THROUGH LOWER BORROWING COSTS.

ONE OF THE MOST USEFUL STRATEGIES FOR YOUR SMALL BUSINESS IS TO SHORTEN THE CASH FLOW CONVERSION PERIOD SO THAT YOUR BUSINESS CAN BRING IN MONEY FASTER. IF YOUR BUSINESS IS EXPANDING, YOU MAY NEED ONE OR MORE INJECTIONS OF CASH DURING THE GROWTH PHASE.