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Behind the Business: American Express

AMEX Senior VP Offers Smart Strategies for Small Businesses

Raymond Joabar, American Express OPENA new product from American Express OPEN, called The PlumCard, is a new tool to help small business owners manage cash flow, particularly those with high materials costs and variable cash flow, such as technology installation professionals. Introduced this past fall, it is a trade terms credit card that offers the option to defer payment or receive early-pay discounts of up to two percent on virtually everything purchased with it, if paid in full within 10 days of the end of the billing period. The PlumCard also offers the ability to defer payment up to two months by paying 10 percent of the balance by the date indicated on the billing statement; and the flexibility to choose which option you want to select each month. In this interview with Residential Systems, American Express OPENs senior VP and general manager Raymond Joabar offers advice on how small businesses in the custom electronics installation industry can improve cash flow management in good times and bad.

What is the most important advice you would give businesses that realize the importance of cash flow management, but dont know where to start?
Weve all heard the expression that money makes the world go’round, but as a small business owner, its important to remember that the money that keeps your world spinning is cash on hand, not unpaid receivables. A good start is to focus on cash flow rather than gauging the health of a business on profit margins, sales growth, or customer loyalty. While these metrics are important, it is cash that pays the monthly bills, covers the payroll, and can be invested back into the company to support expansion.

Most businesses need to take action at some point to keep cash flowing steadily through a small business. One in four small business owners cites cash-flow issues as something that keeps them up at night, according to the Fall 2007 Small Business Monitor, a semi-annual survey of business owners conducted by American Express OPEN. This concern is likely to be even higher in an industry with high materials costs, where large cash outlays are needed for supplies or services to complete a job. Procuring those goods and services can drain small business coffers, leaving insufficient funds to cover operating expenses. Understanding the causes of cash flow problems and planning for them before they start can be key to averting a cash crisis.

In your experience, where do major cash flow problems arise for the small business owner?
Simply put, cash flow issues usually stem from too much cash outflow or not enough inflow. Timing is often an issue, where expenses must be covered before payment is received for them. In other instances, customers may simply not pay on time, even when you have the projected income to cover expenses. You might also run low on cash simply because sales have slumped.

The PlumCard is a new credit card from American Express designed to help small business owners manage cash flow.
If you know that you are facing rapid growth, a large cash outlay, declining sales, or long collection cycles, consider taking action. Review your company overhead and determine if you can minimize costs in any way. Also consider requiring pre-payment of some percent of the project fee for large jobs that will require significant cash outlays. Also consider providing your customers with discounts for prepayment and imposing penalties for late payment. Knowing when you can expect payment is half the battle, so dont neglect good follow-up on your receivables.

To help keep things running smoothly, consider financial tools that can provide access to cash, or flexible payment options. With these tools in place you can weather tight cash periods with your good credit and business health intact. Regardless of the tools you use, be sure to match sources and uses appropriately. Use short-term financing options such as lines of credit, short-term loans or credit cards for short-term cash needs, and long-term or secured loans only for the purchase of long-term assets, such as expensive machinery or real estate.

What is the best way to track cash flow?
A cash flow statement is a powerful tool for monitoring cash flowing in and out of a business. A cash-flow statement will show not only what cash is left at the end of the month, but also the amount that entered and left the business. In other words, it will make it easy to see whether youre adding to your businesss reserves over time, or slowly eroding them. Its important to see this before reserves get low; otherwise, a business with strong sales but lagging receivables can find itself in a bind when it comes to covering unexpected expenses or if the business encounters slow times. If tracking cash flow seems daunting, then take the time to speak with a savvy advisor, such as your C.P.A. or a financial consultant. Theres no replacing the knowledge youll gain from these basic projections. Consider the cost of doing so an important investment in your business.

What advice would you give to an owner who is looking to grow his or her own business?
Plan carefully. Make a conscious decision about how much you have to spend to meet the opportunity, and how long it will be before you will be able to pay it back. Every investment, whether in inventory, people or equipment, should have a clear return. Make sure each earns a profit, but also look at how long it will take to make that profit. Likewise, if you look at each customer as an investment with a scheduled return, youll not only improve your cash flow, but your profitability as well. Allocate costs to each customer by isolating and assigning each cost in the business to a job. Dont use one job to fund another; make sure each stands on its own merits. When each job is profitable, and profits are collected on time, cash flow problems will begin to diminish.

What other common financial pitfalls have you observed owners making when managing a small business?
The best general advice I can offer is to keep growth in mind and prepare for the worst. Starting a new business is exciting, but it can also be financially risky. Before you take the plunge, have adequate insurance coverage for worst-case scenarios. That means life and health insurance for you and your family, in case anything goes wrong. It also means long-term disability insurance, life policies on key employees or partners, and adequate liability insurance for the business. Insure yourself by holding back some reserves, too. Theres no reason to put every penny of your savings into a brand new business. Always keep reserves for unexpected problems, market slowdowns, and to finance growth.

Once you are up and running, ensure that you are making the most of the cash in your business. The first place to look is accounts receivable. Calculate how long it takes to collect payment, called Days Outstanding [Accounts Receivable / Annual Sales x 365]. For invoice-based companies, the national average is about 45 days, but shorter is better. When cash is tight, the next suspect is inventory. Keeping too much inventory locks up cash that may be needed in other areas. Calculate your Inventory Turnover [Annual Cost of Goods Sold / Average Value of Inventory] to see how many times your inventory turns over each year. Larger numbers are better; they indicate that you are not keeping cash locked up in excess inventory. Use the average value of your inventory to calculate your turnover, and compare your result to other companies in your industry.

Finally, once you have achieved some success, be sure that your business serves you, not the other way around. As soon as you have the opportunity, boost your personal wealth by taking some of your money out of the company. That might mean selling a piece of the business to employees or partners, or simply increasing your own salary.