Are you controlling your (cash) flow?
I’m always amazed at how many businesses don’t pay attention to cash flow. It is your financial river that keeps your kayak on smooth water. It allows you to either sleep better knowing you are securely operating a profitable business or keeps you awake because you’re not!
Cash flow is the management of your receivables, money coming into your business, and your payables, money going out of your business. You control how you pay your bills and when you receive payments for invoices and cash from counter sales.
Your ability to see weeks ahead also allows you to make purchasing decisions based on cash availability. If you know your cash on hand is $7,000.00, you may elect to purchase an office computer or revenue producing item for your business. Setting benchmarks for cash on hand, cash to move to interest bearing products, issue bonuses, hire more people; all these decisions become clearer and easier when you control your cash.
Cash flow is also dependent on your marketing & advertising efforts. If you know from experience you’ll be entering a slow period, you may beef up advertising with a promotional discount or giveaway to incentivize customers to buy. This practice can improve your revenue stream in a time that is normally slow. While the margins may be lower, the revenue dollars will increase providing you with operating capital.
What if you are a startup and don’t know your peaks and valleys yet? All the more reason to keep your cash flow current. (Ironically, both definitions of this word apply here. Current as in up-to-date and current as in flow both have meaning to the need in this case.) Reserving cash for unanticipated slow times gives you cash to keep paying bills. To what degree, depends entirely on the cash on hand and the business type. This is where you start making gut decisions.
Click image for full cash flow sample.
Cash flows should be looked at for the short term and the long term. Establishing a worksheet with daily, weekly and/or monthly receivables along with weekly payment schedules gives more insight into how your business is doing.
I helped a client create a cash flow that we monitored on a weekly basis. Based on their predictable income stream from invoicing due dates, we knew what money would come in and when. We added in the payroll, loan payments and expenses as they were due weekly. This generated predictable cash on hand, anticipated the need to dig into a line of credit when necessary and was completely adjustable on a weekly basis for unforeseen income and surprise expenses.
The unexpected advantages are the psychological benefits of taking action when the cash flows dip and you have the luxury of time to do something about it. Maybe it’s a matter of calling a customer who is 30 days past due, delaying a payment or postponing an expense. In extreme cases, it may tell you to increase or reduce your payroll. Predictability is the key. Another psychological benefit is the reduction in stress when you can see the road far enough ahead to act rather than react.
Cash flows should become your best friend when you review them every Monday or Friday. Their accuracy grows as you discover new lines to add to them. Moving from weekly to monthly shows signs of maturity and progress. Forecasting cash flows in annual budgets can drive your goals each year.
- Create a cash flow statement if you don’t have one.
- Monitor your cash flow at least weekly with your financial & key manager(s).
- Set specific actions to be taken when flow is disrupted such as expense controls, receivables policy, what expenses or payments can be delayed and what sales are missing the mark.
- Set benchmark revenue ratios for sales/employee, sales per cost center, etc.
- Monitor your results against your budget, last year figures and rolling 12 month results.
Paul Beaudette is President of Leading Edge Business Strategies LLC, a business consulting firm that helps small businesses achieve their goals through proven business practices and his 34 years of successful business experience.