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CPA Speak: Business Loans and Cash Flow Management

By DALIA CANTOR, CPA

Small practice owners are, more often than not, challenged with cash flow management constraints especially when faced with fronting the cash to pay employees and vendors before getting paid from the insurance companies. Transitioning to a new EMR system, changing contracts with insurance companies or getting reaccreditation with Medicare and Medicaid may stretch out incoming payments for an extended period of time, which means you have to survive for 3 months or more without getting paid.

We would all love to have 6 months of working capital saved up and ready for use when needed. Unfortunately, it's not a reality in many cases and therefore we rely on bank loans to get us through. Bank loans are great if used properly.

Below are some key considerations that need to be addressed when it comes to leveraging your business assets:

  • Bank Line of Credit can be the most distressing type of borrowing
    • The line can be called at any time for the full amount due - especially if the borrowing is up to the max for a lengthy period of time;
    • Make sure to read loan facility agreement and take note of covenant requirements - this is one of the most overlooked things by business owners. Covenants often include certain debt to earnings or debt to equity ratios, a period of time with zero balance, submission of financial statements etc. Noncompliance with any of the covenants may result in non-renewal of the line of credit;
    • If you end up in an alarming cash flow position, you may want to discuss a possibility of converting the line of credit balance into a fixed term loan that will give you the time you need to pay off the loan.

  • Vehicle and Equipment Loans can be refinanced with your current bank at a lower interest rate
    • Consider consolidating all your loans with your banking institution - it bears an additional risk since the bank will most likely collateralize all your assets but in most cases, it will save you some money due to a lower interest rate.

  • Financing personal living expenses through business loans
    • This might seem like an obvious NO NO for most but unfortunately some business owners treat business borrowings as their own personal line of credit;
    • Business will earn income and will be able to service the debt;
    • A business owner as an individual is limited to the income of the business and therefore financing personal expenditures will leave you in a hole because there will be no extra income to satisfy the debt.

So how do you stay ahead and properly manage your cash flow?

  • Work with your CPA to create a budget for your overhead and stick to it;
  • Analyze actual vs. budget variances every month to recognize and remediate any shortfalls - this exercise will enable you to identify problem areas on a timely basis and take corrective action before it gets out of hand;
  • Implement tighter purchasing policies with appropriate approvals, especially when it comes to expensive items such as vaccines and other clinical supplies;
  • Negotiate better terms with your largest suppliers so in the case of a cash crunch you have some time to pay your bills without becoming a bad paying customer;
  • Same advice regarding building personal wealth from a "Millionaire next door" applies to your business - spend below your means;

I always tell my clients to go get a line of credit with the bank when you don't need one because when you do need it you won't get it.

Every successful business is run by numbers so know your financial situation - breakeven point and monthly cash requirement should not be foreign terms for any business owner.

Dalia Cantor, CPA, has been practicing as an accountant and tax advisor since 1997. She is a Certified Public Accountant in the states of Florida and New York, and graduated Dowling College with a Bachelor's Degree in Accounting. Dalia is a member of the American Institute of Certified Public Accountants and the Florida Institute of Certified Public Accountants. Prior to establishing her own practice, Dalia worked in public accounting managing both domestic and foreign audit and tax clients. In private industry, she was involved in the regulatory environment, specializing in technical accounting, internal controls, and SEC reporting for publicly held companies. She can be reached at Dalia@mycpasolutions.com



 
 
 
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