By Bob Meyer

Many companies, especially small businesses, find themselves in excruciating cash crunches and do not know why. Business is good, but there never seems to be enough cash on hand when they need it.

There are several factors that seem to be common among businesses who are in trouble or who are short of cash. Factors which might be overcome with the help of a well-managed barter account.

When small businesses begin, they tend to use the “shoebox” accounting system. That is, they put all of their bills in one shoebox, and all their money in another shoebox.

At the end of the month they take the money out, pay the bills, and what is left over is considered profit. If they had more bills than cash, they cut expenses right then and there. This simple shoebox demonstration is exactly how a business should operate.

Most businesses think that their bank officials are looking directly at their “bottom line” for profits. The bank does want to see profits, but more important, they want to see cash—positive cash.

That means that at the end of the month, there is one shoebox with no bills and another with cash. Don’t confuse cash with profit.

Follow the example below:
• ABC Company costs $10,000 a month to run.
• ABC Company sells widgets that generate a profit of $1,000 each.
• ABC Company sells 20 widgets this month.
• ABC Company makes a profit on the books of $10,000 for the month.
• Terms for payments are 90 days.

Look at the situation as your banker would. Because of the terms of payment, you can’t pay your bills, nor can you service a note.

You are under capitalized and the problem will magnify three times before you see the light. (3 months overhead =$30,000.)

Remember, in three months you will only be able to pay bills that are three months old.

It’s always interesting to hear those business people who say, “I don’t like barter…I prefer cash.” Well, it doesn’t take a rocket scientist to figure out that cash is king.

Savvy traders, like virtually every Fortune 500 company, know that when you can draft inventory to pay a bill, which costs 50¢ cash on the dollar, instead of writing a check, which costs 100¢ on a dollar, you are thinking smart.

Let’s say you did a two year barter plan and determined that you could convert $50,000 a year of your business expenses to trade. What does this mean to your banker?

It means you have an additional $2,500 per month in cash that stays in the shoebox. ($5,000TD in barter purchases less $2,500 cost of inventory replacement equals $2,500 cash not needed to pay bills.)

What is the key word? Cash. Positive cash. Cash left in the shoebox at the end of the month. What is the answer? Well-managed barter. Empty the bill shoebox as much as possible with barter purchases.

Call your trade broker today and write a two year plan. Then you can call your banker with greater confidence, because good barter management can increase your bank line of credit.

This entry was posted on Thursday, January 25th, 2007 at 9:43 am and is filed under Entrepreneurs & Small Business, Marketing, Purchasing & Financing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.