One of the most important things for a business owner is cash flow.
I am sure you have heard of the saying “Cash is King”. Well in small to medium sized business, this couldn’t be truer. In this post we will discuss 7 things that can help your business have a more positive cash flow. Let’s get to it.
1) Bank Balance vs. Cash Balance
I can’t tell you how many business owners I have talked to that think their actual cash balance and the balance in their bank accounts are the same. I completely understand where this notion comes from but let’s clear some things up.
Let me illustrate the difference:
Let’s say your bank balance is $15,000 but you wrote a check yesterday for $10,000 for supplies. Is your true cash balance $15,000? Of course not! Your true cash balance is actually $5,000. This is a simple concept but extremely important to understand. Why? Let’s say in the same scenario you went out to buy a truck for $12,000. If you used the bank balance ($15,000) you would have plenty of cash. But your cash balance is actually $5,000. See how this can become an issue pretty quickly?
You may think this is elementary, and it is, but that doesn’t mean people don’t get it wrong on a regular basis. Glancing at your bank account should never be your financial guide.
2) Accounts Receivable Collections
The rate at which you collect the money you are owed affects your cash flow. I don’t think anyone would disagree with that. However, we get so caught up in other things that we forget to collect the money we are owed. Completing a job and billing the customer is only the first step. If you don’t collect your cash, what’s the point? Keep an eye on your AR balance at all times and make sure to stay on top of customers. I can almost guarantee a client that owes you money won’t remind you if you forget, and the longer you wait the more difficult it will be to get what you’ve worked for. Create a multi-step process for yourself to ensure payment.
3) Tracking Accounts Payable
How many times have you gone into an office and seen a huge stack of invoices in the “to be entered” pile? Maybe you even have a pile like this right next to your computer as you’re reading this! As monotonous as entering invoices might be, it’s important to enter invoices into your system as soon as they come in. Keep a close eye on your Accounts Payable schedule in order to see what bills are about to be due. You may think you have a ton of cash in the bank right now but if you have a pile of bills due at the end of the week, all that cash is going to disappear before you know it.
4) Cash Flow Projections
I think one of the best ways to get a handle on your cash flow is to project out your cash balance for 6 months. The decisions you make today should and will be effected by the future state of your cash flow and if you don’t know what is coming in the future, how can you expect to make the right decisions today?
5) Small Cash Flow Issues
Many people have a misconception that cash flow issues are related to specific large events. Now, sometimes this can be true but more often than not it is a combination of poor record-keeping, bad policies and lack of clarity that lead to the real problems. It is usually a few small issues that snowball over time and lead to a major problem. Don’t just look for the big issues while ignoring the possibility that your smaller issues are the big issue.
6) Stop Projecting Your Revenue Too High
This is where most business owners get in trouble when preparing a cash flow projection. Most business owners are confident in their business and the growth potential, which is great. But sometimes this confidence can be to a fault; my advice is to always be conservative. Of course it’s okay if you have made this mistake in the past, just make the appropriate change(s) moving forward.
I want to preface this one. I am not telling you to be conservative with your business goals or try to grow slow so you can manage your cash flow. I am simply saying to be a realest when it comes to your actual cash flow so that you don’t get yourself into trouble.
7) Understand Your Revenue Cycle
Every business is different. Some have very consistent revenue each month and some have huge peaks and valleys. Just be very aware of your business and how it flows. Let’s say you make all your money in January-March but in June-August you don’t have any sales at all. In the winter months I am sure you are flying high and think you have plenty of cash, but you will need all that cash to stay afloat for the summer months so don’t go spending it all or you will run into major issues. A solid cash projection will help you to stay on top.
Hopefully you have picked up a few things you can use in your own business or life. Sometimes all we need is a frame of reference, and I hope his post has given that to you.
Now, if cash flow is an issue for your business, let’s talk more. We have a great system that we can implement to help get you on track. Give me a call or shoot me an email so we can chat for a few minutes.