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This article was previously published in Appraisal Today newsletter in March, 1993 and was written by Ann O’Rourke. Not much has changed since then. For more information on the newsletter, go to Appraisal Today Info. It is copyrighted. For reprint permission, Contact Us.
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For all businesses, Cash Is King. Every appraisal company, at one time or another, has problems with too little cash. When there are lots of checks coming in we feel rich. When those checks slow down, we worry about making payroll and other payments, and start thinking about better managing our cash flows.
Where are your dollars? Dollars flow through your business. When you bill out an order, they go into accounts receivable, where they sit until paid. When the check is received, the dollars sit until the check has cleared the bank. You want to get the cash inflows in your checking account as soon as possible. On the other hand, you want to delay any payments, or cash out-flows, so you can keep your cash as long as possible. Time is money.
All businesses need to manage their cash flows
Just because few appraisal businesses have over 100 employees doesn’t mean we can’t use cash management techniques used by much larger companies. The key is to start now to set up procedures for making better use of your cash. Don’t wait until you’re afraid you won’t be able to pay your bills.
This article focuses on practical procedures to move cash faster through your business. This is only the first step in cash management. To really manage your cash well, you need to forecast and budget: much more complicated and time consuming tasks. You have to analyze your accounting statements, accounts receivables and payables, set up standards and monitoring systems, and many other tasks. Further articles will discuss how to do this.
When are cash flow problems most likely?
- When first starting a appraisal company, you’re waiting for your first billings to be paid. You probably aren’t swamped with work from AAA clients that always pay very quickly.
- Periods of growth put substantial strains on cash, as your bill payments increase before your cash receipts can catch up. You have cash tied up in accounts receivable. Your financial statements show you’re doing great, but you don’t have any cash available.
- Volatility of workload is a problem in all appraisal companies. Appraisal volume tends to be unpredictable, both in residential and commercial appraisal companies. Labor costs are very high for appraisal companies, and employees must be paid, or your business will be shut down.
How well are you managing your cash?
- Do you finish and bill out your appraisals before they’re due (or past due)?
- Do you deposit checks as soon as possible?
- Do you use banking services, like “sweep” accounts to earn interest?
- Do you make sure invoices are not paid before they are due?
- Do you closely monitor and manage your accounts receivable?
- Do you have a budget and forecast your cash flows?
- Do you receive and use a monthly account analysis from your bank?
Shorten the time between accepting an order and billing
- Increase the number of pre-pays or COD’s, especially with one-time clients and mortgage brokers. This will substantially increase your available cash. The trade-off is losing some assignments. If you’re really afraid to lose business, try asking for a pre-pay or COD. If they seem reluctant, offer to bill them. But, be careful, reluctant might be a sign of a dead beat.
- Complete and bill your appraisals as soon as possible. Every day you delay is one less day of having the cash. You could offer incentives to your associates. An invoice should accompany an appraisal.
- Plan the workload on your support staff so appraisals aren’t tied up waiting to be processed. In residential appraisal companies, when appraisers are paid on completion of the work, some appraisers tend to turn in appraisals right before the deadline for payroll. Try changing their payroll deadlines. For commercial shops, monitor your appraisers’ expected completion dates to avoid an overload on support staff.
- Process and assign new orders as quickly as possible. One day’s delay in assigning is one less day of cash availability.
- Encourage your residential clients to fax their orders. It saves telephone tag, miscommunication, and time zone problems.
Get paid faster after billing
- When you’re really busy, don’t accept assignments from slow-payers. Or, put them on COD. If they’re really slow paying, you should seriously consider not working for them and replacing them with a faster paying client. They’re using your money until they finally pay.
- Offer a discount if paid within 15 or 30 days. Many companies and governmental agencies always take the discounts. This is particularly useful with high commercial fees. Call the client’s accounts payable department and ask if they have any policies on discounts. Be sure your discount isn’t too large. A 1% discount for a month is equivalent to 12% yearly.
- Charge interest or late fees to discourage late payment. Don’t penalize your good customers and reward the deadbeats.
- Closely monitor accounts receivable aging. This is particularly important for new or one-time clients. Also monitor regular clients to see if their payment times are getting longer. It could be a sign of financial difficulties.
- Always have payment terms on your invoices — when it’s due and the charge for late payment. Smart accounts payable personnel pay bills as late as possible. If there’s no due date on an invoice, it goes to the bottom of the pile.
- Don’t accept new appraisal orders from a very past-due client. Although this seems obvious, it’s surprising how many appraisal companies complain about problems with collecting from a client, but continue to accept new orders!
- Tighten up collections. Don’t delay calling, sending letters, or using small claims court. The longer you wait to take action, the less likely you’ll be paid, and the longer you won’t have the cash.
- Run a credit check before granting credit, such as Dun & Bradstreet (800-234-3867). Ask the prospective client for references, and call them!
- Set a maximum a client can charge. Don’t shortchange your main clients.
Get faster cash availability from your receipts
- If you have a large number of checks coming in, use a lockbox. The checks are sent directly to your bank’s post office box, and they process the checks. Contact your bank.
- Make a daily bank deposit. You or one of your staff can do it during lunch or at the end of the business day.
- Obtain availability of 0 to 2 days on deposited checks. Get your bank’s “availability schedule”. Don’t let your bank use the consumer availability of 1 to 5 days.
- Make your deposits before the deadline for crediting, so you don’t lose one day’s interest. Your bank may be open until 5 PM, but only credit funds deposited before 2 PM.
- Be careful using the night depository or ATM. They don’t offer proof of what you deposited.
- If you use an ATM, be sure you make your deposits before the deadline.
Use banking services to manage your cash
- Get a monthly “Account Analysis Statement” from your bank. It is an invoice of your bank charges. Banks prefer that you maintain a minimum balance and pay no fees, rather than pay fees. See which is best for your company. See if your monthly balances exceed your cash needs. Transfer the extra cash to a money market account.
- Set up an “Asset Management Account” with your bank or a brokerage company. They may also be called managed cash accounts or financial management accounts. Besides your checking and savings accounts, they can include credit cards, mutual funds, and brokerage accounts. They all have the “sweep”, and an all-inclusive monthly statement. The sweep feature is usually a daily sweep of cash (over a minimum amount) into a money market (or similar) fund. Amounts below the minimum are swept weekly.
Disburse your money slowly
- Pay invoices on the last day due, not before.
- Mail payments on Thursday or Friday, to take advantage of the “float”.
- Pay your appraisers after you’ve been paid. Labor costs are very high for a appraisal company. Delaying payments lets you use your cash longer.
- Take discounts for early payment only when it pays. For example, a .25% discount for paying a month early equals (approximately) 3% per year. It’s probably better not to take the discount, as you could invest the money and earn over 3%. On the other hand, a 2% discount for one month early, equates to 24% per year!
- If cash is really tight, pay off some bills in installments. Many vendors offer quarterly or monthly payment plans.
- Use business credit cards for travel and miscellaneous expenses. You typically don’t have to pay the bill until about 45 days after the expenditure.
- Consolidate invoices from the same vendor into a single payment.