The importance of cash flow and liquidity to the success and survival of a small business is not a lesson that successful small businessmen need. They already know of its importance. What small businessmen might need however, is a toolbox of cash flow management tools. To this end I have shared a few thoughts on factoring and vendor credit as such tools. Another tool that is available to businesses of all sizes is the PEO.

Professional Employer Organizations provide many valuable services, most of which are easily recognized and well touted. However, there is a likely unknown positive side-effect of using a PEO, cash flow management.

For many small businesses, employee taxes are payable on either a monthly or quarterly basis. These tax bills are not small and leave many small businesses scrambling at the end of the month or quarter to come up with the cash to pay the government. However, when using a PEO, the PEO is responsible for paying the monthly or quarterly tax bill. As a result the PEO collects those taxes from the employer or small business as part of the regular payroll invoicing cycle. In this case the PEO acts as a type of savings mechanism. Although the small business will be forgoing the use of the funds the PEO collects a few weeks or months in advance, there will be no month or quarter end scrambling to pay the bill.

In most states businesses are required to pay a quarter of their worker’s compensation premium at the beginning of the year. The rest of the premium is then paid on a regular basis throughout the year. For many small businesses this initial payment of their worker’s compensation premium can be rather substantial. Not only can it be difficult to come up with the required sum at one time, but the small business forgoes the use of the funds used to pay the premium several months before the benefits of the insurance are consumed. PEOs help to smooth out cash flow by collecting the worker’s compensation premium as part of the regular payroll invoicing cycle. There can be no upfront payment required of the small business. This means your cash can be working for you in the bank or helping you to grow your inventory or extend vendor credit as you work to grow your business.

The PEO serves as a mechanism to smooth out cash flow. In neither of the above cases would you avoid payment of expenses. However, the PEO does help you manage the cash flow associated with the payment of these expenses and therefore represents another tool that can be used in your overall cash flow management strategy. Although it is unlikely that you would make your decision to use a PEO based solely on the cash flow management that they provide, it is a benefit that should be considered.

Richard Zollinger is a finance manager at American Express.

This entry was posted on Monday, June 18th, 2007 at 10:28 am and is filed under Core Competency, Finance, Outsourcing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.