E-Zone Forum: How to Avoid Running Out of Cash
The E-Zone hosted its third forum on “How to Avoid Running Out of Cash” on the 1st of December. The first speaker was Dr. Leslie Fletcher, a professor of accounting at Georgia Southern University. She started by explaining to the participants how to begin by accounting for the balance cash in their businesses. She argued that you have to be careful to collect every receipt that you get such as sales in cash, credit and other operating receipts on an accrual basis. She explained the term “Cash Flow” by saying that it is a measure of a firm’s financial performance over a specific time period. She stated that cash flow problems don’t exist only at small businesses as we have real examples of big businesses such as Enron, Lehman Brothers and American Airlines. In the end, she reiterated the fact that an extended cash flow will result in inevitable bankruptcy if the business owner does not get control over business expenses.
The 2nd speaker was Allen Torpie, an MIT MBA graduate and former president of Times Microwave Systems. Mr. Torpie started by saying that businesses should prepare an annual cash budget by detailing supporting assumptions on both revenue and expenses; Identifying critical disbursement dates; Recognizing seasonality revenues, monitoring cash flows and spending cuts as needed; Maintaining a cash reserve of 60-90 day expenses and developing a contingency plan against threats. He also explained what could be done to maximize cash flows. He said that businesses should establish a bank line of credit; maintain close communication with suppliers and banks, and treat landlords like they are a part of your business. A positive line of communication between you and your landlord will help you because if your business begins to falter in the off-season you will be able to communicate this issue without the risk of being charged a late fee since they are your friend. Furthermore, closely monitor your inventory, if something is in the shelf for too long, don’t be scared of putting a discount on it, that would be money coming in to the business. He finished his presentation saying that businesses should not fail to make timely payroll tax payments. If a late payment is made, once the IRS catches up to it, the penalties are hard. Resist the temptation to pay it late because it’s not a money saver, it’s a money loser.
The 3rd speakers were Chad Avret and Brannen Smith, commercial lenders at the Sea Island Bank in Statesboro, GA. The speakers gave a cash flow analysis from a
bank point of view. They started by asking the question: Am I cash flowing? Businesses should check if they are making their banking payments correctly and are not in the overdraft list. They explained the Debt Service Coverage which is a popular benchmark used in the measurement of a business’s ability to produce enough cash to cover its debt (including lease) payments. The higher this ratio is, the easier it is to obtain a loan. You should take the EBITDA and divide it by the Annual DSC. A ratio of 2 would be great while a 1.25-1.5 would be average but the most probable for these economic times. Cash flows may look good at some businesses but EBITDA and this ratio will tell you the truth about their cash situation. They said that businesses should evaluate their finances monthly, maintain contact with the bankers, make sure the bankers and their accountants communicate with each other and they finished with the quote: “The bank and the business is a partnership”
After their presentations, there was a discussion/debate which gave all of the attendees an opportunity to answer any questions they had. The next E-Zone Forum will be next semester with more information coming soon.
We would like to thank the sponsors of the Forum: Dabbs, Hickman, Hill&Cannon, LLP; Sea Island Bank and Georgia Southern University.
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