By Amy Buttell Crane

Profits alone won't keep your financial-planning practice in business — you'll need a healthy cash flow. If you can't pay your bills, all the profits in the world won't prevent you from going under.

Many cash-flow problems can be traced to nonexistent or poor bookkeeping practices. For a business to thrive, you need to exercise serious discipline with your bookkeeping practices through both offensive and defensive cash-flow management tactics.

Offensive cash-flow management helps you stay on top of billing, collections, and expenses. Defensive cash-flow management helps you prudently manage your cash on hand so that you don't come up short when it's time to pay your own bills.

The offense

Follow these guidelines to mount a winning offense for your cash-flow management:

• Manage delinquencies   Collecting overdue bills from clients feels like a necessary evil, especially for fee-only advisors. Make it clear to clients that you expect to be paid within 30 days of service. Send reminder invoices promptly on the thirty-first day, and decide at what point an overdue invoice will generate a phone call from your office requesting payment. Don't wait too long — the more stale an invoice becomes, the less likely it is to be paid.
• Offer incentives   Entice your clients to pay you quickly by offering small discounts for early payment. Even seemingly small incentives, such as a 1.5% or 2% discount for paying before 30 days, can help keep your invoice visible on a client's radar screen.
• Comparison-shop   When time is scarce, it's often tempting to make purchases without comparison-shopping. But you could be wasting hundreds of dollars over the course of a year. Fortunately, the Internet makes it easy to compare prices for supplies, equipment, and furniture when you use shopping bots such as BizRate.com and PriceScan.com. As for services, aim to collect three written quotes before making a commitment or signing a contract.
• Work with your bank   Aggressively shop for the lowest fees on loans and bank services and for the highest interest rate for your cash deposits. Don't overlook credit unions — these nonprofit organizations are generally less concerned about the lack of profitability in smaller business loans. As a result, their loan interest rates are lower than those provided by for-profit financial institutions.
• Establish a line of credit   The time to apply for a line of credit is when your business is relatively flush, not when your business is facing a cash crunch. Access to emergency financing is vital for small businesses. It generally takes longer to be paid than you imagined.
• Pay on time, not early   When it's time to pay your own bills, pay them on time — you don't want to imperil your business credit rating. But don't pay early — it's never a good idea to tie up your cash until you have to. Also, see whether you can negotiate with your vendors to extend the terms of payment. For example, if you can stretch out a payment from 30 days to 45 days, that's 15 extra days that you can hang on to your cash and let it work for you.
• Write and follow a business plan   Your business plan should project revenues, expenses, assets and liabilities, as well as cash flows. Your yearly and monthly budgets will be much easier to prepare and follow if you can rely on a sound business plan instead of trying to reinvent the wheel by creating a new plan each year.

The defense

After you have a strong offense in place, manage your cash-flow defense by using these tips:

• Invoice promptly   For advisors who rely on fees for all or part of their income, prompt billing is vital. Set up procedures so that bills go out to clients within 24 hours after you complete projects and meeting with clients. Sloppy billing procedures can starve your business of needed cash.
• Establish a cash cushion   Besides establishing a line of credit, build up a cash cushion that you can tap into for emergency expenses. There is never a good time to lose business or to experience equipment breakdown; but when emergencies occur, a cash cushion will help you cope.
• Don't forget Uncle Sam   If you're self-employed, give Uncle Sam his due. Skipping or skimping on estimated payments can incur late fees. And forgetting the IRS can wreak havoc on your cash flow if you haven't stowed away enough cash to pay your taxes on time. Resist the temptation to use money for funding short-term expenses instead of using it to pay taxes.
• Follow a budget   Set yearly, quarterly, and monthly budgets for expected income and expenses. Not every expense can be anticipated, but a realistic budget can go a long way toward avoiding potential cash-flow problems. By staying on top of your income and expenses and matching them to your projections, you're more likely to spot a potential problem before it becomes a major crisis.
• Have just-in-time inventories   Resist the temptation to stock up on commonly used supplies, such as printer paper and coffee creamer, even if those items are on sale. You don't want too much of your cash tied up in supplies that you won't need for months or may never use at all.
• Implement cash-flow analysis   If you're not preparing cash-flow statements, it's time to start. Create a cash-flow statement for each of these three components:
  • Operating cash flow   Identify the money you receive from the financial advice and products that you sell.
  • Investing cash flow   Document your nonoperating activities, such as bank interest and investments in fixed assets.
  • Financing cash flow   Keep tabs on loans or financing that you obtain, as well as any payments to or investments from owners in the business.
  Regularly reviewing these cash-flow statements will help you spot any potential problems in the cash-flow arena.

Disciplined cash-flow management is vital to the future of your business. There's no point in marketing and then selling yourself to clients if you don't have the cash to stay in business on a day-to-day basis — it's like getting the ball and fumbling it just before you reach the end zone. Without cash, the game is over.

About the author   Amy Buttell Crane is a freelance writer based in Erie, Pennsylvania. She writes regularly for BetterInvesting Magazine, Bankrate.com, and the Financial Planning Association. She is studying at Mercyhurst College for a certificate in financial planning. Visit her Web site at www.amybcrane.com.