Question

Felicia’s Footwear is a small company that makes children’s custom footwear. The company make footwear for all ages and specialize in footwear for medical problems and for unusually large sizes (e.g., the 6’9’’young man who wears a size 18 shoe and is still growing, etc.). Although the business has become noted for its deft handling of “problem” footwear, the company still handles a full line of shoes for all children. Felicia uses an old shoebox method of bookkeeping along with her Quicken Books program to keep track of her cash flow. In a recent attempt to obtain a bank loan, the bank manager asked Felicia why she had such a large outstanding accounts receivables balance. Felicia was surprised at the question as she was not aware of its size. She often gave terms to some of her “problem” customers because her shoes were expensive and the parents needed time to pay on the bill. Felicia knew that sales had doubled this year. She had thought this was a good thing but had not realized that the accounts receivables had also doubled.

Explain how managing cash flow is important to a small business and its effects on the small business if not managed properly. In addition, give Felicia some tips on how to handle cash flow data collection and accounts receivables going forward.

Answer 1

Cashflow Management means managing the Inflows and Outflows.

Managing cash flow is the most important thing to effectively operate the business. Whether your business is growing or struggling it is absolutely essential to effectively manage the Cash Flows so that we remain competitive in the business.

Below are the some of importance of managing the Cash flow in Small Business:

1. It helps in making critical business decisions,

2. It allows us to make timely payments to Trade Payable Vendors,

3. Having Cash all time allows us to have bargaining powers and purchase the inventory/services at the rebated rate,

4. It is useful for long-term survival in the business,

5. Having good cash flow also allows the privilege of having Good Credit Line from bankers.

Few effects on small business if Cash is improperly managed :

1. It creates a question about Going Concern of business i.e it may lead to a business lockdown/failure,

2. It also affects the pricing of the services/products,

3. Spoils relationship with vendors,

4. It restricts the growth of the business,

5. We may miss the good business opportunities due to lack of Cash,

6. It may also lead to stress and create problems in personal life,

7. It influences the effective decision making.

Below are the few tips to effectively handle the cash flow:

1. Make the Operating Plan - All the variable and Fixed Expenses,

2. Have strict collection period i.e 30 days , 60 days e.t.c

3. Have strict payment cycle i.e 30 days , 60 days e.t.c

4. Prepare the projections for outflows and inflows in intervals and take decisions on timely collection.

5.Offer discounts for early payments say 2% net 30 days.

6. Invoice promptly as soon as product/services delivered.