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How to fix the hole in your cash flow bucket

Businesses often create a hole in their cash flow bucket when they use the automatic methods in their checking account to borrow and pay down a line of credit.

Here’s how to fix that hole. (The advice may differ slightly, depending on the size of your company and dollar amount being borrowed.)

First, you must take back control of the decision-making process in borrowing and paying down debt.

So, disconnect that automatic transfer. Remove the authorization that you may have given to your accountant to make transfers when the checking account was low.

Is there a downside to this? Yes, but it is small.

The original premise for the sweep was that you would pay less interest expense, calculated on a lower amount. In reality, often the opposite occurs. Borrowing increases and companies pay more interest, not less.

Since the interest rates are fairly low, changing to daily or weekly line of credit decisions shouldn’t have a significant effect (depending on your LOC balance).

Now, set up a system to make eyes-wide-open cash decisions.

If your company is large enough to have a bookkeeper, controller and/or chief financial officer, you should be getting a daily or weekly dashboard, scorecard, or key performance indicators. In the 10 key performance indicators that you monitor, include your cash balance and line of credit balance.

At the end of your daily dashboard report, put these three choices:

(1) Pay down line of credit $ ____.

(2) Borrow line of credit $ ____.

(3) Hold the line of credit $ ____.

And then sign and date the report.

Congratulations! You have taken back control of your cash.

Instead of unconscious borrowing, you now make sound business decisions to pay down your LOC, borrow or not borrow.

For the record, this is not to imply that the sweep money was borrowed without your consent.

When you signed the LOC or sweep agreement, you authorized the bank to transfer the money on your behalf. This made your life easier, but it was based on bank calculations, not yours.

Changing the way you borrow cash brings awareness. Awareness brings benefits.

Now, you are communicating more with your bookkeeper, controller and CFO.

And you have removed the responsibility of going deeper into debt from the bookkeeper and banker to where it belongs – with you, the owner.

You also may find yourself questioning, for example, why you have to borrow money when sales are high and expenses are low. Without that pause, review and questioning, you might not take the time to research and discover that the selling price is wrong, or someone in your company is skimming or embezzling.

You also will pause for other cash outflow decisions, such as bonuses and extra items that require cash.

If you can identify yourself or your company with the above scenario, then this change may be for you. If not, sweep away.

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