Working Capital Critical In Challenging Climate

OCEAN CITY – With a challenging business climate and rising interest rates, business owners should consider the management of working capital a top priority. Yet many neglect to focus on analyzing their cash flows, forecasting their cash positions and developing short-term investment guidelines that will help them improve the return on their idle funds. Sound investment guidelines coupled with effective cash management can, for even short time horizons, generate interest income that contributes to a company’s bottom line.

Anthony Carfang, co-founder and partner of Treasury Strategies Inc., suggests that good cash-flow forecasting is important if a company wishes to improve interest income. While cash-flow forecasting cannot guarantee future performance or success, it is a sound cash management practice. Online banking services are increasingly helping businesses monitor their cash positions in real time.

A company’s investment guidelines serve as a “road map” for selecting appropriate investment alternatives. This policy should state acceptable investment vehicles, outline acceptable risk parameters (security and interest rate), and provide guidelines for the investment’s maturity (overnight out to two to five years). Most business investors have three primary objectives:

— Preserve Principal: loss of principal is unacceptable.

— Maintain Liquidity: cash must be available when needed

— Achieve Highest Yield: while complying with safety and liquidity requirements

Historical sales patterns can provide the trends for future cash flows. Cash-flow forecasting may also come from the field sales staff, especially for manufacturers or wholesalers. These projections, whether weekly, monthly or quarterly, help the company project account balances and develop a short-term cash-flow forecast. This analysis helps ensure that they have funding for daily operations while allowing them to project the balances that may be invested out over a longer term and potentially increase the yield on the portfolio.

As you consider investment options, you should answer four basic questions:

1. How much cash is available for investing and for how long? This is where short-term cash-flow forecasting is essential.

2. What securities may be invested in and what is an acceptable credit rating?

3. How is the business organized?

4. What is the company’s tax bracket?

Your accountant or tax advisor can provide you with this important information and should be relied upon to guide you through the challenging business climate of today.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410