Portfolio

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Published: October 9,2000

As a small business owner, you probably have found that it’s necessary to categorize your money. If you think about your business operation, you’ll likely be able to

identify at least four categories of funds: “operating money” that you use for current expenses, “invested money” that’s working to earn more money, “restricted

money” that is committed in some way and “potential money” that’s on your books but hasn’t been realized yet.

While each type requires a different strategy, you’ll want to create an overall plan to enhance your return on funds your business controls. The payoff can be more

substantial than you may think. At many businesses, for example, net profits are a small percentage of gross sales. That means you probably handle far more money

than you keep. By using cash effectively while you have it, you can improve your bottom line without increasing sales. Consider this: One year’s interest on $100,000

at 5% is $5,000.

Each type of money your business touches will likely require a different approach. Here are some examples and ideas that may help you create your business’ cash

management plan.

Operating money

You most likely keep a certain amount of money to cover your regular business expenses such as payroll, taxes, debt payments and other operating expenses.

Because these expenses recur at regular intervals, your operating funds may turn over relatively quickly.

The challenge: find ways to enhance income on the funds while keeping them available for expenses at the same time. Potential solution: money market funds,

investment certificates or short-term bonds. These investments may help you earn a competitive rate of return without risking substantial volatility or lack of liquidity. In

choosing the most appropriate investments for you operating money, consider consulting a knowledgeable financial advisor. Such a professional is familiar with a wide

variety of opportunities and can help you match investments to your particular situation.

An investment in a money market fund is not guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Although the fund seeks to

preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. CDs are FDIC insured and offer a fixed rate of return

and fixed principal value.

Invested money

If you’re fortunate, you have excess business cash to invest in bonds, stocks, mutual funds or other securities. But even if you don’t have such investments, you

probably have “invested money” working in your inventory, business real estate or perhaps some types of insurance.

Your challenge with this type of money is to balance risk and return by spreading your funds across several types of investments. Such diversification may reduce your

exposure to a downturn in any one-asset class and actually enhance your overall return.

Restricted money

Most businesses set aside funds for escrow, credit collateral, pension or retirement funds, time deposits (CDs, annuities, etc.) or as insurance cash value. Although in

many cases the money must remain committed to these purposes, you may be able to use it to secure lower-interest credit.

Reducing the rate you pay on a loan or line of credit can be well worth the effort. Say, for instance, you have a $100,000-loan for inventory, and you use your

restricted money to reduce your interest rate from 9.5% to 9%. Your monthly payment would be considerably less, freeing up the difference for other purposes.

Potential money

Have you created value for a customer or your own business, but haven’t received cash payment for the work yet? This “potential money” may take a variety of

forms, including accounts receivable, credit value of customer goodwill, contracts for future goods or services, inventory value and business property and equipment.

Your biggest opportunity with potential money is simply turning it into real money as soon as possible. A few ideas include managing receivables with the shortest

terms possible, following up promptly with delinquent accounts, taking advantage of low-or no-cost inventory loans from willing suppliers and using part of your

inventory or business property as collateral for a loan.

Putting it all together

Sorting out all these types of money may seem confusing, but they each play an important role in helping your business succeed. You can pull them all together with an

overall financial plan for your assets. Such a plan can help make sure your business and personal dollars are all working hard toward your goals.

Gary N. Garner is a personal financial advisor with American Express in Jackson and Hattiesburg.


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