There’s a running joke in the horse industry. It starts with a question: How do you make a small fortune with horses? The answer, say the wags, is that you start with a large fortune.

Robbing savings to keep a business afloat only works for so long. One of the greatest business ironies is that a stable can even show a profit on paper while going under because of a negative cash flow. A negative cash flow simply means that come the end of the month, there isn’t enough money to pay the bills. A negative cash flow seldom happens suddenly. It usually builds slowly, obscured over time by liberal use of credit cards or an occasional horse sale or those repeated borrowings from savings. Then hay suddenly jumps in price or there’s a bill for colic surgery or your only tractor dies, and the game is over.

How do stable owners get caught with their cash down? They’re not alone, say accounting experts. Poor cash management practices are one of the biggest causes of small business failure. Paying careful attention to key business management strategies can help avoid a cash bind, they say. Here are 13 ways they advise stable managers to keep cash flowing from month to month.

1) Create a Cash Budget. “Budgeting is the most crucial aspect of cash management,” says CPA Lillian Cushny of Lexington, Ky. Many horse people are reactive spenders, living in the here and now. They simply pay the bills for the vet, farrier or hay as they come up, praying there is enough in the bank to cover the checks. They have a vague idea of what months tend to be profitable or not. Beyond that, however, they do little or no planning for meeting emergency expenses or investing the occasional windfalls from, say, a major horse sale.

Instead, says Cushny, barn managers and owners should be proactive in planning ahead for monthly expenses and estimating their monthly income (see sidebar). “You have to know when the dollars are coming in and when they are going out,” says Cushny. It’s important to set realistic budgets to compare actual income and expenses against what’s expected in order to spot small cash flow problems before they turn into big ones.

2) Bill Promptly. Horse people are often afraid of billing, notes horse business consultant Caesar Nespral of Canyon Country, Calif. Clients expect bills and it’s important to remember that the stable is in business to make money. Do not be shy about billing. In fact, say others, you should be very aggressive. “A bill doesn’t start aging until the customer receives it,” notes Jack Krichavsky of Arthur Andersen in Hartford, Conn. Try to bill at the time of service whenever possible, he advises. If it takes 5, 10 or 15 days to send out a bill, that much time is automatically attached to the wait for the cash.

3) Collect Receivables Aggres­sively. Actively managing receivables is one of the best ways for stable managers to keep cash flowing. Brian Kost, of Deloitte & Touche in Hartford, estimates that after six months, a small business has a less than 60 percent chance of collecting unpaid balances. The longer a bill goes unpaid, the less likely the business will ever receive the cash. Rebill promptly after 30 days, call slow payers or use late fees to encourage prompt payment. One Fairfield, Conn., lesson barn found its accounts receivable dropping from $7000 a month to just $500 a month after they followed their accountant’s advice to levy a late fee on overdue accounts.

4) Tighten Credit Terms. Horse people tend to be suckers for sob stories, notes Cushny. But it’s imperative to make sure a boarder’s cash crisis does not become the stable’s. Try to avoid extending credit to customers as much as possible. Encourage prompt payment with small discounts or establish a policy charging for lessons missed without 24-hour advance notification.

At the very least, scrutinize very closely the credit of customers asking to pay for things like horses or stud fees before extending them any credit. Ask your banker to order a credit report before offering the customer a payment plan. Credit ties money up in accounts receivables, subjects a business to bad debts and increases administrative costs.

5) Maximize Your Own Avail­able Credit. Learn to use OPM—Other People’s Money—whenever possible instead of your own. Take full advantage of the 30 days remittance time offered by suppliers when paying bills. Use a line of credit with the bank to finance major expenses like that load of hay that’s going to last all winter. The line of credit will spread the cost out over several months and help keep a reserve of on- hand cash for other monthly expenses like paying salaries and the electric bill. Offer a discount for purchasing a block of lesson time or other services in advance to boost cash reserves. And take advantage of lines of credit with credit card companies and put things like office equipment or supplies on a business credit card. A combination of factors including the merchant’s promptness in submitting the purchase and the close of the billing cycle can help you hang on to cash for up to several more weeks.

6) Watch Pricing. Too many small entrepreneurs underprice their goods and services and have too low a profit margin, says Krichavsky. Cushny and Nespal agree. Many stable managers do not even know how to figure the break-even point for their business. Nespal notes that many horse businesses are too generous, giving away small services such as delivering blankets for cleaning and repair, clipping, blanketing, trailer storage and administering medications. They forget that those same services have real costs in labor, gas and wear and tear on their own equipment. Whether these services are priced individually or as an overall package, stable managers need to take them into account.

Survey the competition, Nespal advises, and know what prices are standard. Be aware of all costs and understand that if they cannot be passed on to customers, they will come out of profits. Nespal points to trainers who charge clients a fee for hanging show drapes, as an example. If the pricing structure will not allow you to pass the cost of the drapes and the labor to put them up on to clients, you need to think about whether they’re really necessary. “You are looking for a happy medium between just making enough to pay the bills and gouging clients,” he says.

7) Put Reserve Cash to Work. Make the most of available cash, says Kost, by occasionally taking the checking account to its minimum balance and investing the surplus in very short-term investment vehicles until it is needed. At a minimum, keep reserve cash in an interest-bearing savings account instead of a checking account or look into short-term certificates of deposit or Treasury bills.

8) Learn to Barter. Do your suppliers need any of your services? Do any of your clients provide services you could use? Then consider bartering. Barter works best when the cost to provide a service like riding lessons is less than what it would cost to buy the service you are trading for. Consider bartering lessons or training for barn supplies, accounting or legal services or graphic services for a farm brochure. Talk to the editors of regional media where you normally advertise about swapping a monthly advice column for an ad.

9) Develop Multiple Income Streams. The biggest problem Cushny sees in the horse industry are people who are trying to make a go of it with a single income stream, particularly boarding. “It’s really hard to be profitable and to charge enough to cover all your costs,” she says. Nespal points out, again, that many people give away services that they could charge for, thereby passing more costs along to customers.

10) Reduce Expenses. Every advisor points out that the easiest way to increase cash flow is to spend less (see sidebar). A business with a 10 percent profit margin needs $1,000 in sales to generate $100 of profit. Turned around, if that business saves $100 in expenses, it’s the same as if it made $1,000 of sales. Nespal notes that when cash gets tight, a farm can be better off donating horses to youth groups or other programs because that immediately reduces costs.

11) Leasing. Leasing can help with cash budgeting two ways, depending on whether the stable manager is the lessee or the lessor. First, leasing things such as an office computer or new vehicle can spread the demands on cash out over many months. Second, leasing out horses helps by temporarily taking their daily costs off the farm’s books while also providing an income stream.

12) Keep Good Financial Records. Budgeting cash flow, tracking expenses, managing accounts receivables and other things that will help cash flow all require good financial records. With the computing power and versatile business software available today, business owners have ready resources to monitor the financial health of their business. Good financial records can help prevent overpaying estimated quarterly taxes or abusing a line of credit that can cost monthly cash reserves.

13) Get Good Advice. If you do not understand basic accounting concepts such as break-even points or how cash, receivables, profits and sales are related, find an accountant or other financial advisor to help track cash flow. Check regional horseman’s directories and equine media for the names of accountants with horse expertise. The federal Small Business Administration has a Website (www.sba.gov) filled with helpful information for stable managers who want to become more business savvy. Many states have small business development centers that provide free business counseling and can help you analyze and improve cash flow. Some state societies of certified public accountants have volunteers to provide small businesses with free accounting services.

Creating a Cash Budget

Big businesses project their cash needs on a daily, weekly and monthly basis. That’s more bookkeeping than most stable managers have the time or inclination to do. At a minimum, however, you should develop a monthly cash flow budget so you can spot a potential cash crunch before it puts your business in a bind.

A cash flow budget isn’t complicated to produce once a system is in place, but if starting new, set aside some time to create one the first time around. Gather all of the receipts, tax forms, bills and check registers that detail the previous year’s income and expenses and organize them by month. Use this information to project monthly cash needs for the coming year.

If you are computer-oriented, use a spreadsheet program such as Microsoft Excel to help organize financial data. If you prefer pushing a pencil to rapping a keyboard, an accounting ledger from an office supply store works well, too. Look for one with at least 25 columns across.

Down the side, list all sources of income and regular monthly expenses. Do not overlook those occasional or hidden expenses that can leave real holes in your wallet. Use the lists here to help get started by adapting them to your own business situation:

SOURCES OF INCOME

• riding lessons
• training
• selling horses
• leasing horses
• boarding or layups
• misc. service fees
• bathing
• clipping
• exercising or turning out horses
• bandaging
• massage or other sports therapies
• blanketing
• trailer storage
• administering medications
• blanket washing and repair
• tack cleaning
• hauling
• judging
• coaching at competitions
• clinics or speaking engagements
• schooling shows
• renting facilities to outside event organizers
• writing for equestrian media

MONTHLY EXPENSES

• hay
• grain
• supplements
• bedding
• farrier care
• routine veterinary care
• worming
• consumable grooming supplies
• manure pickup
• trash pickup
• landscaping and snow removal
• electricity
• water
• heat
• telephone
• postage and shipping expenses
• gas and oil for trucks, tractors
• staff salaries and benefits
• stable equipment repair and replacement
• show entries
• advertising and sponsorships
• meals and entertainment

OCCASIONAL EXPENSES

• insurance
• stallion reports, registrations, blood or DNA testing
• property taxes
• income taxes
• vehicle maintenance and replacement
• facility maintenance
• facility improvements
• office equipment maintenance and replacement
• routine dental care
• major veterinary expenses

Across the top, devote two columns of the chart to each month in the year. Use one to enter your projection of income or cash needs, the other to enter actual income or cash outlays. If you are just starting out or have incomplete business records, projected income and expenses should be an estimate based on careful research. Depending on your business’ ordinary cycle, you may want to take the cost of occasional expenses like insurance and divide them into 12 monthly “payments,” which you save and set aside until the bill comes in. Or you may want to use occasional income, such as revenue from a clinic or show, to fund occasional expenses like fence repairs or new footing for an arena.

Your cash budget will help you see the seasonal fluctuations in your income more clearly and plan for volume purchases of things like hay or other periodic expenses that can create a dent in your accounts. With a cash budget, you can figure out whether enough cash has been saved in advance to cover these expenses or whether you need to use leasing or financing to spread their costs out over several months to save cash for other expenses. The budget will put you in control.

—BK